A lot has changed…one thing hasn’t

Investors are faced with more choice than ever. But they are searching for something as investing itself: cost-effective solutions with the right balance of risk and return potential.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

30 years ago, investors were faced with a simple choice between stocks (for capital growth) and bonds (for income). Today, it’s a question of how best to access those asset classes. Fund managers are coming up with new ways to offer clients the tools to carve out an edge in an increasingly information-intensive and efficient marketplace. As fund managers have found it harder to outperform markets, the range of investment specialties has grown.

In the active-equity space alone, investors have their pick of investment vehicles and disciplines to help them meet their financial goals.

There is more data to exploit, and different ways to mine for above-benchmark returns.

    • The earliest and most common form of active equity investing
    • Focuses on a relatively small group of well-studied stocks
    • Relies heavily on human intellect, insight and intuition
    • Aims to take the human element out of the equation
    • Focuses on a specific set of stylised, quantitative characteristics (e.g. quality and earnings)
    • It is rules-based and transparent in process, but static in what it covers
    • Aims to identify information not yet reflected in market prices
    • Like fundamental managers, systematic managers are also looking to discover a company’s fundamental strengths, but emphasise a scientific approach to arrive at their conclusions
    • Harnesses the power of Big Data to inform investment decision-making
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In many ways, systematic investing sits neatly between fundamental and factor-based investing. It brings together human intellect and the power of computer driven analysis to take a risk-managed approach in pursuit of returns above those being offered by the broad market.

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Graph positioning systematic investing as a middle ground strategy in comparison to Fundamental and factor investing as discussed above

 

Source: BlackRock, May 2020. For illustrative purposes only
Risk. There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up

BlackRock Systematic Active Equity: Active management for the ages

Investors desire three key things from all forms of active management:

1) The potential to outperform the benchmark
2) A focus on managing risk
3) Fees that do not significantly erode investment returns

BlackRock Systematic Active Equity’s (SAE) mission is to use cutting-edge technology, such as machine learning (computer programs that learn through experience), to reveal sources of returns others miss, while minimising risks that do not increase the likelihood of returns. Ultimately, the team is asking the same questions as traditional equity managers — but answers those questions in new and different ways.

Risk. While the investment approach described herein seeks to control risk, risk cannot be eliminated

We build a combined potential-return forecast for 15,000 companies across 44 countries each day. (BlackRock, May 2020) Stocks are ranked based on their relative attractiveness, with each mathematically scored in three categories: 

1. Fundamentals – A company’s financial information

2. Sentiment – The attitude of investors to specific stocks

3. Macro themes – Events in the wider economy

Each of these dimensions is assessed through traditional company and market research, as well as newer methods that capitalise on Big Data and technology in an effort to uncover insights early and gain an advantage over those investors with no access to this information.

Risk. There is no guarantee that research capabilities will contribute to a positive investment outcome

Using this three-pronged approach, researchers develop “signals,” or market insights, that SAE fund managers use to build and maintain investment models. It is through these models that each stock is scored and ranked daily on our three criteria (fundamentals, sentiment and macro themes). The stock rankings are not static, but evolve as signal views change.

The individual signal scores are then aggregated into an “alpha score” – essentially a return forecast for each stock. This return forecast is assessed alongside risk and cost considerations to ascertain whether the stock is worthy of inclusion in SAE portfolios.

Shades of risk and return

Systematic investing offers a well-balanced combination of risk and return potential compared to other investment disciplines.

Graph positioning systematic investing as a middle ground strategy in comparison to Fundamental and factor investing as discussed above

 

source: BlackRock, April 2020. For illustrative purposes only. This information demonstrates, in part, the firm’s Risk/Return analysis. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. Active risk reflects tracking error, or the divergence between the returns of a portfolio and the returns of a benchmark, and is a measure of the risk in an investment portfolio that is due to active management decisions.

Key Takeaways

  1. Human intuition and expertise and technology can work together to produce returns for investors:
  • Humans provide immeasurable insights on behaviours and sentiment not captured by an algorithm
  • And machine processing may be able to eliminate the natural vagaries of emotion and capture nuances unseen to the human eye
  1. In an ever-changing world where investors are chasing the same shallow pool of returns, innovation may increasingly be required to deliver outperformance
  2. We can source returns by tapping into the strengths inherent in different investment disciplines, as well as different markets and industries

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy.