An MSCI survey asked global institutional investors and wealth managers about their current thinking in regard to equity factors and how the role of factors is evolving in their asset allocation decisions.

In spite of the divergence of returns between growth and value styles in recent years, respondents affirmed trust in factor investing and agreed that style factors will be the primary driver of future returns ahead of allocations to a particular sector or country.

Five investor insights were captured from the study. First, investors’ faith in equity factors has increased despite poor past performance. Second, many investors have shifted to value and quality. Third, factors are seen as key elements of active performance to reduce portfolio risk. Fourth, investors believe that the definitions of factors should evolve over time and new factors should be identified. Lastly, investors are focused on how factor investing converges with different trends, such as the impact of environmental, social and governance (ESG) factors on investments.

The survey results show that investors see the cyclical nature of single factors and are increasingly considering them as essential for asset allocation and portfolio rebalancing. Respondents also expressed interest in enhancements to traditional factor definitions, through additional measures to define a factor such as value or by finding new factors such as analyst sentiment.

The authors included a summary of some of the new factors that MSCI has added to its risk models. One example is machine learning, which MSCI believes has the potential to further parse returns and improve the explanatory power of factor models.

Source: “Equity Factors: Investor Views and Research Insights,” by Abhishek Gupta and Mark Carver; MSCI Research, June 2023.

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