The extraordinary performance of mega-cap tech stocks has significantly impacted factor returns, creating both opportunities and challenges for systematic investors, according to Invesco.

The findings come from Invesco's ninth annual Invesco Global Systematic Investing Study, Navigating complexity: the rise of systematic strategies in multi-asset portfolio construction, based on the views of 131 institutional and retail investors that collectively manage $22.3 trillion. It reveals a growing sophistication in investors' use of systematic strategies as they adapt to complex and fast-changing market dynamics.

Tech stock dominance requires systematic investing rethink

Invesco found factors aligned with the success of large tech companies such as Momentum, Growth, and Quality have performed exceptionally well over the past year, while Value underperformed¹. Now, concentration risk has driven a turnaround with more than half (52%) of investors increasing their allocations to Value in the past 12 months as they seek a potential hedge.  

"The continued growth of U.S. mega-cap technology companies has led to increased concentration in the global equity markets which may create unintended risks in multi-asset portfolios," said Mo Haghbin, Head of Solutions, Multi-Asset Strategies, Invesco. "Investors are increasingly adopting systematic strategies to address this challenge, mitigate concentration risk, and help diversify their portfolios as they navigate this new environment."

 Adaptability has enabled systematic investors to perform well in this environment. Over the past 12 months, 46% of systematic investors reported outperformance over both traditional active approaches and market-weighted strategies, contrasting with underperformance of just 8% and 6% respectively.

Need for adaptability drives increased sophistication

The need to react quickly has led to increased uptake of techniques that enable portfolios to immediately adapt to sudden changes in the macro environment. 80% of respondents cited factor tilting strategies as very valuable, while 67% highlighted the importance of asset class and sector rotation models.

The key driver for pro-active factor allocation, cited by 82% of investors, is the desire to adapt to economic cycles. This is also reflected in the rebalancing of factors weights, with nearly all (91%) investors now adjusting their factor weights over time, an increase from 75% in 2023.

As markets become more changeable, investors' time horizons are also decreasing. While 40% of investors still assess performance on a standard 3–5-year time horizon, a third (32%) now use a 2-to-3-year horizon, up from less than a quarter (23%) in 2023.

The rise of alternative asset classes in systematic portfolios

Invesco found a clear trend towards more diverse systematic investor portfolios, including a significant uptick in the use of alternative asset class strategies. The study reveals 40% of investors now apply a systematic approach to real estate (vs. 31% in 2023), 36% to commodities (vs. 26% in 2023), and 34% to both private equity and infrastructure (vs. 32% and 28% in 2023 respectively).

This diversification is enabling investors to build more holistic and integrated multi-asset allocation models. However, the application of systematic strategies to less liquid assets can create challenges, particularly considering liquidity constraints rank as the first- and fourth- most important considerations for institutional and retail investors respectively when building multi-asset portfolios.

Systematic investors are addressing this by using tools such as liquid proxies² or derivatives, which enable them to adjust overall exposure to less liquid asset classes such as real estate, while retaining the ability to quickly rebalance.

"We're seeing higher allocations to private markets across the board, specifically within private credit and real estate," continued Mr. Haghbin. "The combination of these higher allocations and increased accessibility to a larger universe of cost-effective data has led more investors to adopt a systematic approach to alternatives that allows them to access traditionally less liquid asset classes more efficiently."

The data revolution continues

Underpinning the rise of increasingly diversified and sophisticated systematic portfolios is a data revolution transforming the way investors make allocation decisions. The availability of increasingly diverse data sources to inform portfolio allocations has made this possible.

While macroeconomic data (97%), fundamental company financials (81%), and technical analysis indicators (76%) are most often used, the integration of alternative data sources is also gaining momentum, with nearly a quarter (23%) of respondents including alternative data such as satellite imagery, shipping data, and weather information in their models.