Asset manager: Invesco

Atlanta-headquartered Invesco has an illustrious 175-year history. But its reputation as an important asset manager for official institutions has notably taken off only during the past few years. The reason: the firm is making a concerted, multi-year effort to develop its relationships globally with central banks and sovereign investor institutions. That effort now appears to be bearing fruit. “We have seen an increase in new central bank clients, as well as additional mandates from existing central bank clients over the past four years,” Rod Ringrow, head of official institutions at Invesco, tells Central Banking.

Invesco supports the central banking community in several ways, including providing reserve managers with important market knowledge, developing insights from a long-running peer survey and offering specialist training, in addition to its typical product offerings. As a result, it has developed business with a greater number of central banks around the world. There was no let-up in its efforts to meet the needs of official sector clients in 2022, despite challenging market conditions for both equities and fixed income.

One area in which Invesco is making advances is ‘factor investing’, which has attracted more than $3.5 billion of official institution money. Notably, Invesco secured significant additional funding to an equities quant investment strategy for a central bank during the uniquely volatile market conditions. The US asset manager was chosen from among 40 other providers during an open search for a new global equity strategy mandate.

“We wanted to diversify our classic active approach by adding smart-beta strategies to be more diverse and flexible, and achieve consistency of returns in different market environments,” a senior reserve manager at a mid-sized central bank, who asked for their identity to remain confidential, says. “That was the main goal.”

The central bank initially invested $300 million and recently topped up its investment to $1 billion, the official tells Central Banking. The strategy is meant to achieve a one-percentage point outperformance to benchmark and achieved 200 basis points excess returns against the MSCI World Index in 2021, and around 270bp in 2022 (although it underperformed during the unusual market conditions of 2019 and 2020).

The central bank’s assets under Invesco’s management constitute a significant proportion of its overall foreign reserve assets. Due to the success of the investment and strong relationship with the US asset manager, Invesco was awarded another portfolio investment for the same strategy tied to another segment of assets managed by the central bank.

Value, momentum and quality

Invesco’s multi-factor model adopted by the central bank is based on hundreds of stocks selected according to three factors: value, momentum and quality, says Georg Elsaesser, a senior portfolio manager at Invesco: “These factors have different cyclic characteristics.”

‘Value’ stocks are those that are considered ‘cheap’ that others tend to be selling, Elsaesser explains. An active manager would attempt to pick the cheapest of stocks, after an in-depth analysis, and then place ‘bets’ on a few of them. But Elsaesser views such efforts as typically featuring “high active risk, high active money [and] high tracking error”. The factor investment specialist believes that the mere fact that stocks appear to be ‘cheap’ means they are likely to generate a long-term premium relative to the benchmark index. “That means we are not looking to buy 30 or 40 cheap stocks. We are looking to buy, maybe, 200 cheap stocks,” Elsaesser says. “We know that some of them may be cheap for a reason and stay cheap, but on aggregate and broadly diversified, these stocks tend to generate a premium over the long term.”

The next prong of the quant strategy adds stocks chosen according to ‘momentum’. This means investments are made into stocks that are in demand from other investors. “And then you’re approaching the ‘mother-of-all diversification’ in equity markets,” Elsaesser claims. He believes both value and momentum stocks should generate a long-term premium, but by buying both what others sell as well as buy diversifies the volatility of individual factors. It should also reduce the correlation of relative returns to traditional equity strategies.

Finally, the ‘quality’ component offers a risk-and tracking-error-reducing effect. This involves scoring the quality of assets based on elements including corporate governance, asset and debt growth, and credit metrics. Invesco has a team of 27 researchers looking at these signals. “It’s an ongoing evolution,” Elsaesser says, to find the most meaningful market signals.

“All three of these concepts: value, momentum and quality, earn a premium in the long term, on aggregate,” Elsaesser adds.

Elsaesser says the rationale that cheap stocks go up in value – eventually – appeals to central banks, who he says are the only “true” long-term investors, as many have investment horizons of three years, five years or even longer. He adds that the credibility of factor investing is higher now than in 2019 and 2020, when it failed to deliver outsized returns. “It’s a long-term game, even if it can run against you in the short term,” he adds.

The smart-beta strategy has capacity because around 600 stocks are invested in at any one time. The wide pool should significantly reduce single stock risks. Stock scores are being continually assessed and the composition of stocks in relation to the strategy is rebalanced every month. The diversity of stocks should make it easier to exit positions, should the need ever arise. In a fire sale, Invesco claims it would be possible to liquidate 90% of the stocks in an average portfolio, within a day.

The reason for Invesco securing additional investments from the undisclosed central bank was not only due to the strategy delivering consistent, higher-than-benchmark returns, says the senior reserve manager, but also for offering important knowledge transfer: “They combine all the things we look for in a manager.”

The Central Banking Awards 2023 were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Joasia Popowicz, Ben Margulies, Riley Steward, Jimmy Choi and Blake Evans-Pritchard.