Systematic Investing

Systematic investing is a calculated method that often involves the use of quantitative models and data analysis to determine investment strategies. It involves rigorous analysis over different periods and selecting an investment where regular contributions are made to a desired level. After these contributions are made over a certain duration, the investor is rewarded with a return on investment.

Systematic investing uses big data, data science applications, and human expertise. The employment of quantitative methods, along with analysis, helps achieve consistency and portfolio outcomes, even in conditions of market volatility. Additionally, it aids in risk management for investment portfolios.

The strategies employed help build portfolios that outperform the markets. They can be categorized into factor-based strategies and pure alpha strategies. Factor-based or style-factor investment strategies rely on initial return ideas from quantitative models developed in the 1980s. These include factors such as momentum, value, and volatility. Returns are generated through risk premia, behavioral anomalies, and structural inefficiencies. Pure alpha strategies focus on new and unstructured data and incorporate machine learning for forecasting. These systematic alpha strategies aim to produce returns in excess of market indices.

Some of the strategies that are involved in systematic investing are the following:

1. Single and Multi-Factor Strategies: Single-factor strategies focus on a single factor when investing, such as value or volatility. Multi-factor strategies, on the other hand, consider multiple factors, such as both value and volatility, across various asset classes.
2. Multi-Strategies: As the name suggests, multi-strategies combine multiple strategies under a single approach. They often allocate fixed contributions or unit purchases into predetermined amounts for each strategy. Similarly, multi-asset strategies diversify investments across multiple asset classes, such as bonds, stocks, and commodities.
3. Capital Protection: Capital protection, along with risk-hedging strategies, helps avoid and offset risks through lower-risk investments. These investments are usually focused on fixed income and equity.
4. Risk Parity: Risk parity strategies aim to balance a specific level of risk or market volatility across all investments, including both purchases and fixed contributions.
5. Momentum: Momentum strategies focus on investing based on momentum as a primary or exclusive factor. This approach can be applied across all asset classes or limited to a single asset class

Let us look at some of the examples to understand the concept better.

Example #1 - A Hypothetical Example

Imagine Dan is an investor who has been participating in the stock market for a few years. Initially, he based his trades on subjective opinions about market performance. While occasionally, these opinions yielded returns, the losses were significant. Dan decided to use a systematic investing calculator to assess the sustainability of his approach. He then consulted a fund manager, who utilized data science methods to create a portfolio for Dan that involved regular monthly contributions.

This systematic approach helped Dan remain disciplined and avoid making hasty decisions based on market volatility, ultimately leading to better results. Dan no longer relies on the systematic investing calculator to track his portfolio’s growth, as he is confident in its performance.

Example #2 - A Real-Life Example

Invesco, an asset management company, released the Global Systematic Investing Study 2023. The report highlights advancements in data analytics and technology that are enhancing the application of systematic investing techniques across various asset classes. The study surveyed 130 systematic investors managing $22.5 trillion and identified four key themes. The first theme addresses the use of diverse toolkits, noting that investors are implementing strategies beyond traditional factor investing to adapt to market volatility and seize new opportunities.

Another significant theme is the evolution of portfolio construction, with a shift towards incorporating growth as an investment factor and diversifying dynamic factors. The third theme focuses on the adoption of artificial intelligence (AI), with half of the respondents already using AI and high future growth prospects. The final theme covers the challenges of meeting complex environmental and social governance (ESG) standards, with systematic strategies aiding investors in navigating these ESG challenges.

Some of the key benefits of systematic investing are:

• Quantitative methods ensure the use of data, statistical models, and methods to generate accurate results. They eliminate individual bias and help in selecting the best investment and timing for consistent investing.
• The use of models and quantitative data improves the prediction of market trends, keeping investors focused on the process and reducing the chances of deviating from their investment plan.

Systematic investing helps individuals achieve their financial goals.

• Consistent and systematic investments simplify the investment process, bringing clarity.
• A clear process for allocating funds over specific periods aids in capital protection and prevents investors from being swayed by market volatility.
• This approach promotes rational decision-making and helps investors avoid reacting emotionally to market fluctuations.
• It encourages diversification of funds, as a plan is already in place.
• Systematic investing helps manage risks and supports better financial planning.