The rise of factor investing

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Equity index provider, MSCI, has seen three major trends that are changing investment markets, from investors wanting to strip out any involvement with controversial weapons and guns in their portfolios, to the reduction in global home buyers.

MSCI managing director and head of research of Asia Pacific, Chin Ping Chia, said home buyers were instead investing their money in international equities, instead of investing in property in their home countries.

That had been a distinct shift, with more investors investing and considering international equities than ever before.

MSCI's indices were not only used by investors and advisers as benchmarks, but by fund managers to create funds or exchange traded funds. That was where the second trend came into play, as there had been an increase in factor investing.

"Factor investing was really about investing in a basket of stocks that shared very similar characteristics, for example low volatility or very good quality [stocks]. Increasingly more and more investors were adopting these types of strategies in their portfolio," Chia said.

In addition to that, over the past three years, there was a 40 per cent increase in benchmarking to MSCI's factor indices, with the most popular, and in demand indices being minimum volatility in nature.

There was already $85 billion in assets linked to MSCI's minimum volatility indices and that would grow even higher, Chia said.

For a fund manager, they simply just replicated MSCI's portfolio based on the composition of the index itself, whereas investors used the minimal volatility index as a benchmark of their low volatility strategies.

The third major financial trend he noticed was the huge increase in environment, social and corporate governance (ESG) investing.

More investment owners wanted to decarbonise their assets, while investors wanted to remove assets like controversial weapons and guns from being involved in their portfolios, he said.