Nick Eatock

Global investment firm Carlyle (NASDAQ: CG) and Invesco (NYSE: IVZ), a leading global asset management firm has announced an agreement for Carlyle to acquire intelliflo from Invesco. intelliflo is a market leading provider of cloud-based practice management software for independent financial advisors (IFAs) in the UK. The transaction includes intelliflo’s US-based subsidiaries, including RedBlack, a provider of SaaS-based portfolio rebalancing tools, and intelliflo Portfolio, a Portfolio Management software solution for US Registered Investment Advisors (RIAs).

The purchase price of up to $200 million is comprised of $135 million at closing, which is expected in the fourth quarter of this year subject to certain closing conditions, and up to an additional $65 million in potential future earn outs.

Founded in 2004 and headquartered in London, intelliflo offers an end-to-end software platform used by over 30,000 professionals at approximately 2,600 advisory firms, supporting the management of approximately £450 billion in client assets. intelliflo’s platform delivers CRM, financial planning, client onboarding, compliance workflows, and reporting functionality. Its cloud-native, multi-tenanted SaaS architecture integrates with over 120 third-party applications. The transaction aims to strengthen intelliflo’s market-leading position in the UK and accelerate its growth in Australia.

As part of the transaction, intelliflo’s US-based subsidiaries will be established as a standalone business called RedBlack, run by a separate management team. This separation will allow both businesses to better serve and focus on their existing customers and markets. intelliflo will focus purely on delivering market leading software and innovation for the UK and Australian markets, and RedBlack will focus solely on delivering for RIAs and other financial advisors in the United States. Carlyle will support the carve-out of both businesses from Invesco and partner with both leadership teams to execute their respective growth initiatives.

Equity for the investment will be provided by Carlyle Europe Technology Partners (“CETP”) V, a €3 billion fund which invests in technology companies across Europe. The CETP team has significant experience in financial software, wealthtech, and vertically focused SaaS, with current and recent investments including SER Group, CSS, SurePay, and Calastone.

Fernando Chueca, Managing Director in the CETP investment advisory team, said: “intelliflo is a mission-critical software provider to the UK’s wealth management ecosystem, with a deeply embedded and loyal customer base. We are excited to partner with Nick, Bryan, and the team to unlock the company’s full potential and deliver a new stage of growth.”

Nick Eatock, CEO and Founder of intelliflo, said: “This is an exciting moment for intelliflo. Carlyle’s investment reflects its trust in our business and its deep experience in scaling software companies make it an ideal partner for our next phase of growth. With Carlyle’s support, we will continue to focus on delivering great value to our clients, with a renewed focus on building innovative solutions for the evolving needs of our core UK and Australian customer bases.”

Bryan Perryman, the CEO of the newly formed RedBlack, said: “Our team is highly motivated by the opportunity to bring our full focus onto the US market as an agile, standalone company. RedBlack has a rich history of delivering market-leading software solutions for our US RIA customer base. We are excited to be backed in this endeavour by a sponsor with the reputation and credentials of Carlyle, which will continue to best position RedBlack to support advisors’ needs.”

Doug Sharp, Senior Managing Director, Head of Americas and EMEA, at Invesco, said: “As intelliflo and the newly incorporated RedBlack embark on their next phases of growth with Carlyle, we are confident that both companies are well-positioned for continued success and innovation in the wealth technology space. We look forward to our continued relationship with intelliflo and RedBlack through our common interaction with wealth advisor clients.”

Evercore served as financial advisor to Invesco and HSF Kramer acted as legal adviser. Altman Solon, PWC, Oliver Wyman and Ringstone conducted due diligence on the acquisition. Gibson Dunn acted as legal counsel to Carlyle.

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Andre Roberts

Half of systematic investors have already integrated artificial intelligence (AI) into their investment process, according to the Invesco Global Systematic Investing Study, which reveals a widespread expectation that AI tools will transform portfolio management in the years to come. The majority (62%) anticipate that, within a decade, AI will be as important as traditional investment analysis and 13% expect it to become more important.

The Invesco Global Systematic Investing Study is an evolution of the Invesco Global Factor Investing Study, published annually since 2016. The reposition this year reflects the changes within the quantitative investing world, and the use of quantitative methods beyond factors. The study, which is based on the views of 130 institutional and wholesale systematic practitioners’ that collectively manage $22.5 trillion in assets, also finds a growing consensus that the systematic toolkit can help investors navigate key challenges, such as volatile markets and imperfect data.

The AI revolution already underway, led by APAC and North America 

Systematic investors are already using AI across a range of core functions.

Globally, respondents reported harnessing AI to better understand the market environment and identify macroeconomic turning points: 46% are using AI to identify patterns in market behaviour, and 38% are using it for portfolio allocations and risk management. Investors appreciate AI’s ability to help mitigate human biases and forecast the unexpected. 

On a region-by-region basis, Invesco’s study found significant variations in attitudes towards AI and natural language processing (NLP), with investors in EMEA markedly more sceptical than their APAC and North America counterparts.

 APAC investors were revealed to be the furthest ahead in utilizing machine learning and AI as a systematic methodology for portfolio construction.  Half (50%) of APAC respondents report utilizing such tools versus 30% globally, 35% among North American respondents and only 12% of EMEA respondents.   

Similarly, investors from APAC and North America are more likely than EMEA-based investors to be using AI across the investment process.  65% of APAC and 48% of North American investors use AI to identify patterns in market behaviour versus 33% of EMEA respondents; meanwhile, 35% of APAC and 20% of North American investors are using AI to monitor and adjust investment positions in real-time versus just 10% in EMEA. 

APAC and North America investors also led EMEA investors across every use of NLP in the investment process, including sentiment, news and risk analysis.  

Investors broadly expect the use of AI to grow significantly in the coming years. While a significant minority (29%) already use it to develop and test investment strategies, the vast majority (76%) anticipate doing this in future, and while 20% currently use it to monitor and adjust investments positions in real-time, more than half (55%) expect to do so moving forward.

APAC investors are the most convinced that AI will become more (20%) or equally (73%) as important as traditional analysis methods for the investment process within the next 10 years.  North America investors were similarly convinced that AI’s role will become more or equally as important as traditional analysis, contrasting markedly with the majority of EMEA investors (51%) who believe that AI will still be less important than traditional analysis methods in ten years’ time.

“Many Asia Pacific investors developed and matured more recently than peers in EMEA and North America, so it’s possible that they have a bit more organizational flexibility and dynamism to work with new tools such as AI and NLP in the investment process,” said Andre Roberts, Melbourne-based Senior Portfolio Manager in Invesco Quantitative Strategies.  “This is still a rapidly developing area of systematic investing, so I expect the gap in AI adoption between the regions to close as practitioners become more comfortable with these tools.”

In examining the benefits and challenges of implementing AI into systematic strategies, wholesale distributors identified improved risk management as the main benefit (76% of respondents), followed by the flexibility to adapt to changing market conditions (65%). However, challenges remain; wholesale respondents cited the cost of implementation (64%) and the complexity and interpretability of AI models (61%) as the main obstacles to adoption. 

Institutional investors instead see accurate and timely insights (78%) as the most compelling benefit of AI, followed by improved risk management (74%) and increased efficiency and automation (68%). Their primary concerns are complexity (78%) and data quality and completeness (51%). 

The growing systematic toolkit helps investors tame markets

Factor investing has historically been the cornerstone of systematic investing, but Invesco’s study reveals a far larger toolkit of systematic strategies that have helped investors navigate the key challenges of recent years.

Tools to decipher the macroeconomic environment have become especially important, and the ability of systematic approaches to help mitigate market risks was a key theme in this year’s study: the majority (63%) of investors agreed that systematic strategies helped them manage market volatility in the past year. Moreover, nearly 60% of respondents said that the new higher inflation market regime was supportive of the systematic approach, with only (6%) of institutional investors and (10%) of wholesale investors disagreeing. 

For three-quarters of respondents, dynamic asset allocation has become a core component of their approach, helping them to rebalance and adjust their portfolios in response to the market environment. Systematic tools have helped investors identify and characterise the underlying macroeconomic regime, allowing them to make inferences about its impact on different asset classes, factors, regions, and sectors.

“In recent years, markets have frequently been described as ‘unprecedented’ and acutely challenging to navigate, with each year becoming somehow more complex than the prior one,” added Andre Roberts.  “It’s notable that despite this increasing complexity, investors are not abandoning but rather evolving and refining their systematic approaches to meet these new challenges.  At the same time, systematic managers know their risk management and diversification works through the cycle, helping ride the bumps presented in volatile markets. This represents a strong vote of confidence in the future of systematic investing.”

Bridging the ESG data gap

The usefulness of systematic approaches is not limited to the macroeconomic picture.  Respondents have commended systematic strategies as an antidote to the challenges around ESG, particularly bridging the ‘data gap’.

Invesco’s study found around two-thirds of respondents are using systematic strategies to incorporate ESG into their portfolios, and systematic tools have become useful for helping investors decode ESG variables and metrics, which can have a meaningful impact on performance.

APAC investors led the way in incorporating ESG into their portfolios with almost universally incorporation at 97% of respondents, ahead of EMEA at 94% and North America at 61%.  According to APAC respondents, the top advantages of using a systematic approach to applying ESG were improved performance (90%) and improved risk management (83%). 

Around half of respondents agree that systematic investing can help to apply ESG when data is scarce, and many noted that they were using systematic tools to reconcile the inconsistencies between ratings agencies and develop company scores from raw data.

“Just a few years ago, ESG analysis and integration into the investment process was broadly unheard of in APAC.  The transformation we have seen among the regions’ investors is nothing short of remarkable,” commented Andre Roberts.  “A confluence of factors has driven this take-up, including regulatory change, popular sentiment and a recognition of the performance and risk management impact of ESG incorporation.  And of course, there has been the demand from clients and end investors, many of whom include ESG outcomes in their investment objectives.  ESG integration is likely to remain a core component of systematic strategies moving forward with increasing sophistication and capabilities.”

Beyond traditional asset classes and factors

Invesco’s study also found a growing consensus that the systematic approach can be applied across a broader range of asset classes than previously thought.

Systematic models are now well-embedded within fixed income and equities, but higher yields, coupled with a shift from quantitative easing, has meant that conventional macroeconomic considerations have returned to the fore in determining returns across various countries and sectors. This has boosted the appeal of systematic strategies for commodities and currencies: while only a quarter currently target commodities this way, 59% view this as a focal point moving forward.

The new macroeconomic environment has also prompted investors rethink conventional wisdom about what constitutes a factor.

Notably, four in five respondents now recognise ‘growth’ as a standalone factor, challenging traditional academic views which contended that ‘growth’ was difficult to define precisely. Investors do not see growth as the opposite of value, or vice versa; rather, as distinct and in some cases complementary factors, as evidenced by the rise of nuanced and blended factors like ‘growth at a reasonable price’.

Read the report.

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Now in its tenth year, the study details the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks, who together manage US$23 trillion in assets^[1].

Key findings from this study show that sovereign wealth funds now see inflation, alongside global geopolitics, as the biggest threat to global growth over the next year. Two-fifths of respondents expect inflation in developed markets to remain stubbornly high over the next two years, a further two-fifths expect inflation to steadily decline, and just under a fifth anticipate stagflation.  There is some consensus that inflation should subside in the coming years, albeit above pre-pandemic levels, with over half of respondents (59%) expecting US inflation to average 3-4% over the next 5 years.

Sovereign wealth funds are reconsidering their macroeconomic assumptions and adjusting investments accordingly as inflation and interest rates rise rapidly.  Most respondents (59%) have repositioned their portfolios in anticipation of further rate rises, reflected in the continued decline in allocation to fixed income and a corresponding increase in allocation to private market alternatives, notably real estate, private equity and infrastructure, which most (71%) respondents agree are effective inflation hedges.  Private assets now constitute, on average, 22% of sovereign wealth funds’ portfolios.

When asked which asset classes they intend to increase, maintain, or decrease exposure to over the next year, private equity was the most popular (net +29%), followed by unlisted real estate at +23%.

By contrast, respondents were most bearish on fixed income (-12%) and cash (-4%), while sentiment on equities is broadly unchanged (+1%).

Terry Pan, Chief Executive Officer for Greater China, Southeast Asia and Korea at Invesco commented: “The confluence of factors driving uncertainty over the beginning of this year was unprecedented for many finance professionals, and it will take some time for risk-on sentiment to rebuild.

“In Asia Pacific, investors are closely eyeing how COVID restrictions in China will evolve, as the government continues to pursue its ambitious economic growth target.  While we expect the market to remain volatile for some time ahead, with inflation less of concern across this region, there is still room for policy stimulus to support the economy.”

Other key findings

Investors to increase exposure in North America and Asia Pacific; further central bank allocations to RMB expected

Sentiment around European investments has suffered as a result of the military conflict in Ukraine.  Developed Europe (19%) and Emerging Europe (13%) are the geographies to which sovereign wealth fund investors are most likely to decrease exposure. Respondents are most likely to increase exposure to North America (33%) and Asia-Pacific (23%).

Prior years’ findings have indicated a high level of interest in allocations to China.  The majority (52%) of sovereign wealth funds said that China was a more challenging place to invest than last year, while 33% of respondents agree that the interdependence of US and Chinese will mitigate underlying geopolitical risk.

While the USD remains the dominant global reserve currency among central banks, allocations as a share of reserves had been steadily reducing for years, declining from 65.4% to 58.8% between 2016 and 2021.  Central banks recognise that the Chinese RMB will continue to grow as a portion of global reserves, especially following the freezing of Russia’s foreign exchange reserves.

RMB allocations rose from 1.1% of central bank foreign reserves in 2016 to 2.8% at the end of 2021, and a sizeable majority (63%) of central banks now have RMB allocations.  Most central bankers see their position as underweight, intending to increase it in the next five years, while 29% believe the RMB will become a “true reserve currency” in the next five years (versus 29% who disagree).

Digital assets remain too volatile, but digital central bank currencies present opportunities

Despite the widespread anticipation that institutional investors will embrace digital assets, sovereign wealth funds do not yet see them as investable. Just 7% of sovereign wealth funds have any exposure to digital assets, and much of this is through investments in underlying blockchain companies. Volatility (68%) and regulatory pressure (55%) are the most common concerns, and just 15% think that digital assets can act as a credible inflation hedge.

Both sovereign wealth funds and central banks see existing cryptocurrencies as potentially threatened by the launch of central bank digital currencies (CBDCs), with the People’s Bank of China leading the effort to create its own digital RMB that could facilitate greater efficiency in payment systems and ultimately support further allocations to RMB as a reserve currency.  Among central bank respondents, 55% agree that cryptocurrencies are threatened by the existence of CBDCs, compared to 31% of sovereign wealth funds.

Mr Pan concluded: “With cryptocurrency banned in China as of 2021, the opportunity set around digital assets in Asia is naturally limited, however the digital RMB pilot programs could herald a major expansion of the currency for cross-border payments, thus increasing its overall appeal as a reserve currency.  This is a potentially transformational technology that could portend major changes for central bank currency management.”

Read the report.

———

[1] Sourced by NMG Consulting: total assets of those sampled stands at $23 trillion as of March 2022.

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Stephen Quance

Invesco has released the findings of its seventh annual Invesco Global Factor Investing Study. The Study is based on interviews with 151 institutional and retail factor practitioners managing over US$25.4 trillion in assets combined.

This year’s study found respondents expect factor-based strategies to outperform in an inflationary environment with slow economic growth. Respondents also believe the current market environment makes factor investing in fixed income more attractive as a better way to manage volatility and diversify portfolios.

Market turmoil highlights value of factors in managing risk

Persistent inflation and rising interest rates over the past 12 months have dramatically impacted the investment environment, compelling respondents to re-evaluate their portfolios including factor exposures. Despite these challenges, respondents still generally believe that factors are well-suited to managing risk during market turbulence, with 67% agreeing that factor investing helped them manage market volatility over the past year. A similar number, 64%, indicated their faith in factors grew over the previous 12 months.

Meanwhile, factor allocations continue to rise, with 41% of respondents increasing allocations over the past year and 39% planning an increase in the next year.  Only 1% of respondents decreased allocations to factor over the past year.  Respondents expect value, low volatility, and quality to be the best performing factors over the next 12 months. A majority (over 80%) believe their factor allocations have met or exceeded the performance of their fundamental active strategies, while 64% indicated their factor allocations met or exceeded performance versus market-weighted strategies.

Stephen Quance, Global Director, Factor Investing at Invesco, commented, “The fact that investors actually increased their support and exposure to factor strategies through this latest global bear market cycle speaks to how comfortable and confident they have become with a factor approach as a pillar of investing alongside active and passive.  This is a trend we have seen across geographies including Asia Pacific where factors can systematically target specific outcomes in a risk-off, rising rate environment.”

Meanwhile, the frequency at which respondents review and change their factor definitions is evolving.  41% stated they rarely (every 3-5 years) change their factor definitions, which is down from 66% in 2021. Currently, 43% of respondents are changing their factor definitions frequently (every 1-3 years), up from 16% in 2021.

Respondents looking to fixed income factors for new sources of return

This year’s research indicated an increased demand for fixed income factors as bond markets ended a multi-decade bull run. Over 50% of respondents believe the current market environment makes factor investing in fixed income more attractive. Fixed income factors also continued their steady increase in acceptance this year, with 92% of respondents believing factor-investing can be successfully applied in fixed income, a significant increase from 61% in 2016.

Investors generally see fixed income returns as closely tied to fundamental macroeconomic variables. Respondents applying a systematic approach to their fixed income portfolios often initially prioritise traditional macro drivers of return, such as inflation and interest rates, before later incorporating investment factors such as value. This year 54% of respondents said they use both macro and investment factors, and only 14% target investment factors in isolation.

Within fixed income asset classes, respondents are using factor investing the most in government bonds (76%) and corporate bonds (75%), reflecting both the depth and liquidity of these markets as well as the number of products available. Respondents anticipate that factor investing will spread further in fixed income, with a clear majority (71%) believing they will use high yield bonds as part of their fixed income factor exposure in the next five years.

Stephen Quance commented: “The evolution of factor strategies in fixed income illustrates the continuing evolution of the segment overall.  Without a tailwind of falling interest rates, the importance of factor exposures may increasingly explain deviations in results.”

Increased application of factors to ESG

Respondents have shown increasing adoption of ESG in their overall portfolios, driven partially by a conviction that such adoption can enhance performance.  This conviction has come under pressure over the last year as extractive industries have broadly seen strong returns, reflected in the fall of respondents to 59% (from 75% last year) who see enhanced performance as the main reason for ESG adoption.  Notably, while enhanced performance was previously the most commonly cited reason for ESG adoption in factor investing, this year the top reason was demand from clients and beneficiaries (76% of respondents).

This challenging period for ESG performance is seen by many as creating an opportunity for factor investing. Improved performance is cited by 72% of respondents as the advantage of using factors to help implement ESG and 66% of investors now believe factors can be used to implement their ESG objectives, an increase from 2018 (42%). However, the lack of consensus around methodology remains a barrier to implementation, with respondents’ keen for further research in this area.

Stephen Quance concluded: “ESG adoption continues to increase in Asia Pacific to the point where it is now a discussion topic in most client conversations.  Many regional clients have even set their own ESG targets.  Investors in the region are keen to understand the potential impact of these targets on the risk and return of their portfolios, which is where factor analysis and implementation can serve to counter any unintended biases.”

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Martin Franc

The Australian arm of the global fund manager, Invesco, has announced the launch of ‘Invesco Chase’, a virtual cycling event for teams suited to the work-from-home lifestyle we find ourselves in today.

The event is designed for the financial advice and investment community with the aim of bringing people together in these isolated and difficult times. Most importantly, the initiative will support two charities that have become increasingly relevant during this pandemic, namely, Beyond Blue and Foodbank Australia.

The event will be held on October 30 and allows participants to ride together (virtually) in teams of colleagues or peers.  Registrations are taken in teams of four, or individuals can sign up and be allocated to a team.

The advanced ‘Summit’ race involves four riders in each team seeking to reach a total elevation of 8800 metres (2200m per rider) in less than 3 hours; the equivalent of conquering Mt Everest. There will be a less demanding alternative option known as ‘Base Camp’ where teams will have to cycle to a virtual elevation of 4400 metres (1100m per rider). Riders will compete in real-time via the popular stationary cycling app Zwift.

“We are committed to the communities where we live and work, and we are motivated in providing a broader positive community impact, and at the same time create stronger links within our industry,” said Martin Franc, Invesco Australia CEO.

“We have launched Invesco Chase, a virtual cycling challenge which we hope will grow into something special over time.”

“This virtual sporting event is designed to connect a network of our peers and to help others beyond our industry via two outstanding charitable organisations.”

“We at Invesco are delighted to embrace this opportunity to promote community wellbeing and connection within our industry,” he said.

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