Internal capability, a limited range of products and a lack of belief in the theory are factor investing's three biggest barriers to entry cited by wholesale investors, according to Invesco's annual smart-beta survey.
The survey, entitled Invesco Global Factor Investing Study 2018, found internal capability scored 6.7 out of 10 - where 10 is the most significant barrier - while a lack of products and a lack of belief scored 6.4 and 6.1, respectively.
Invesco conducted interviews with 300 institutional and wholesale investors across 21 countries with $19trn assets under management.
The report said a high score on internal capability shows investors see factor investing as something entirely separate from active or passive management.
"[Factor investing requires] specific rather than generalist expertise from elsewhere in the internal team," it said. "The development of internal capability is therefore an essential pre-requisite."
In terms of where investors said there was a lack of smart-beta products, illiquid assets scored the highest with 72% of respondents believing this while 65% said investors and 63% pointed to liquid alternatives. Meanwhile, just 15% said there was a lack of products in the equity space.
Georg Elsaesser, senior portfolio manager, quantitative strategies at Invesco and author of the report, commented: "The idea of a shortage of factor products may seem unlikely but investors see only equities as being well covered.
"Even fixed income is seen as sparsely covered, although the picture for institutions is better than for wholesale investors," he continued. "In the newer and more innovative applications of factor investing, the product landscape is relatively empty."
However, the survey found the barriers to entry in general have fallen since 2016 with the lack of belief in factor theory dropping 1.5 points in two years while the internal capability barrier scored 1.8 points less.
"This means [internal capability] is now the biggest barrier to overcome, but is no longer the mountain it was in 2016," Elsaesser said. "However, there is still a long way to go.
"Education remains the key to increasing adoption rates. I still find myself having to explain factor investing in general for 90% of a meeting rather than the specific products."
Of the specific factor strategies used by wholesale investors, 72% said they used value while 59% said size and momentum completed the top three with 54% of respondents implementing this factor.
"Value has retained its place as one of the leading factors with broad usage," the report said. "However there have been significant reductions in the appearance of low volatility, momentum, and quality across the samples.
"It is likely that part of this is due to substantial changes in sample size and composition, so the comparisons between different years should be made with care."
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