Total time: 7:23
Sage Advisory: Hello and welcome from the 2019 Sage Perspectives on the Future biennial conference. I'm here with Ward Bortz, who is Senior Client Portfolio Manager for Invesco’s fixed income factors platform. Welcome, Ward.
Ward Bortz: Simon, thank you very much.
Sage Advisory: Ward’s just been presenting at the conference on factors and the evolution of fixed income investing. Why don't we start off Ward – factor investing, for the people that aren't so familiar with the subject, perhaps you can explain what it actually is.
00:34
Ward Bortz: So, I define factor investing as the application of decades of scientific and academic research to actual investment solutions. So, for a long time, 50 years plus, these academics effectively sat in an ivory tower, did research, and in the 1980s/1990s, people said why don't we take this research, systematize it and offer it in actual investment solutions? What that research shows is if you tilt to a few simple characteristics – a lot of them you will likely recognize – value, high quality, high momentum, stocks that are trending up or bonds that are trending up – you tend to do better than just owning the market overall.
Sage Advisory: Okay. And it's been widely used in the equity market, but in the fixed income market, is that more recent? And if so, perhaps you can explain a little bit about how that works?
1:30
Ward Bortz: Yeah. So, a lot of it has to do with data, something pretty boring. In the late 1960s, there was a data set called the CRISP data set, which a bunch of grad students and undergrads at the University of Chicago went hand by hand through the Wall Street Journal, and wrote down all the prices of stocks and they finally started to record it. This went on for about 12 years. And in 1981, a fellow by the last name of Banz, decided, you know what, I should look and see if the smaller stocks did better than the larger stocks. And it turns out, that was exactly what the case was. And in fixed income over that same time period, there was no data set to be able to do that type of analysis. In about 1996, some of the investment banks started keeping track of what the prices are for corporate bonds. So where are General Electric 28s trading today? Where are they trading next week? Where are they trading, you know, just over time? And so very similar to the equity marketplace about 10 years later, folks said wait, so now we have a little bit of data we can look at, let's see if some of the same characteristics that have tended to drive return within the equity marketplace also work in credit. And that was effectively the birth of factor investing in fixed income. And we're starting to see the growth in products and the growth and adoption now.
2:56
Sage Advisory: Okay, so how widely used is factor investing in the fixed income market? And where are we in relation to that in terms of the growth potential for the marketplace?
Ward Bortz: So, we estimate on the institutional side worldwide, there's about $120 billion in fixed income factor assets. In ETFs in the U.S., there's about $10 billion. And on the mutual fund side in the U.S., call it $50 to $70 billion, depending on how you define it. So, call it a $200 billion market. So, this is not completely nascent in that no one's adopted it. But when you're talking about the total size of the fixed income market, or you're thinking about the amount of assets, trillions of dollars, that are allocated to these types of strategies and equities, it still is relatively small. We think that there is tremendous amount of opportunity for growth. The fact that there's more transparency in terms of the process, there's a tremendous amount of research driving the investment decisions in any factor-based solution, and also the fact that factor-based products tend to be priced somewhere between traditional active and passive strategies. So again, that potential for outperformance at a lower fee are highly attractive to investors and will lead to even more growth.
4:15
Sage Advisory: How does style and style boxes, how do they work in comparison to factors? What is the connection between the two? Can you explain a little bit about the difference between the two and how they work together?
Ward Bortz: When I think about style boxes in the fixed income marketplace, I think of kind of how Morningstar defines the different categories. So, in equity land, you've got large-cap growth, you've got large-cap value, you've got small-cap value, small-cap growth. And you can have certain factors that fit in those different boxes, right? So, for example, momentum tends to be more like a growth strategy. Value, as you would guess, tends to look a little bit more like a value strategy. In fixed income as we, at least at Invesco, think about building fixed income solutions, we tend to do it in the context of the categories that exist. So, for example, we’ll apply the concepts of a factor-based strategy within the high-yield marketplace with the goal of delivering better performance than other high-yield managers and the high-yield index. If we're building a core strategy, it will have the goal of beating the Barclays Agg, which is kind of the general benchmark for that category, and other strategies within the core space. And then what investors can decide is, what do they want their interest rate exposure to be? What do they want their credit exposure to be? And they can adjust in the same way they would in the equity marketplace, try and understand what they want their growth and value exposure to be.
5:49
Sage Advisory: In terms of the future, are there any innovations or changes that you expect to see in the next year or so that investors might want to look out for in terms of fixed income factor-based investing?
6:02
Ward Bortz: I think a few things. So, on the investment side, technology. So, the proliferation in systematic equity solutions, whether they be indexing, just traditional indexing, or systematic factor-based solutions, came with the growth in electronic trading in the equity market that really started in 1990s and has grown significantly since then. As technology improves within the bond marketplace, my expectation is that will make it easier to implement the systematic strategies and lead to growth in the systematic fixed income market factors in fixed income market. So, I think that's one. Two, solutions; there is a dearth of factor-based solutions in the marketplace. So, relative to the amount of traditional active solutions, it's fairly confined in terms of what outcomes people can offer and in what wrappers they can offer them as it pertains to factor-based fixed income solutions. So, my expectation is you've seen some growth, and you'll continue to see growth. It’ll actually accelerate in terms of the types of wrappers and whatnot that can offer these types of strategies.
Sage Advisory: Ward, thank you very much for your time. It's been really useful. Thank you.
