Shattering the myths & misconceptions around systematic investing

Systematic equity investing remains a much-misunderstood investment discipline – managers are still having to overcome the impression that funds are run entirely by algorithms. We look at some of the most persistent myths and the reality behind an asset class that could play a key role in your investment portfolio.

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.

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Systematic investing is no different from factor investing

Reality: While it’s true that factor and systematic investing are both “quantitative” in nature, systematic investing is very different. Factor investing focuses on a stylised set of known characteristics (e.g., earnings or cash flow) that are deemed to be drivers of returns. Systematic investing is not limited to “accepted” return drivers and seeks to tap into the superabundance of data – and technology available to process it – to arrive at new, diversified sources of equity returns.

Managers are just mathematicians using a computer to pick stocks

Reality: One misconception about systematic equity managers is that they are essentially software programmers with little knowledge of financial markets. Human intellect and knowledge of financial markets are, in fact, central to systematic investing, though the primary skill sets may differ from traditional equity investors. Data scientists, mathematicians and investment professionals are all essential to finding and evaluating insights, and creating the models that can capture them.

With so many automated stock picks, fund managers don’t have any real conviction

Reality: Some think selecting companies by algorithm means potential returns are spread across too many stocks. Surely, it makes sense to invest in a traditional equity fund that invests in 40-50 stocks the fund manager really believes in? But systematic investors are conviction investors too. Our conviction is in the signals – or ideas – we are constantly refining to keep up with the opportunities that our fast-moving data sets are identifying. This can enhance diversification benefits and help tap into emergent trends that traditional managers might miss, providing a potential performance edge.

Risk. There is no guarantee that a positive investment outcome will be achieved.
Risk. Diversification and asset allocation may not fully protect you from market risk.

The manager with the most data wins

Reality: Some believe Big Data is all that is required for a successful systematic investing program. The truth is that the technology to process it, as well as the right people and culture, are of equal if not of greater importance. Arriving at innovative ideas requires differing views and a culture of debate, particularly as established signals fade or become outmoded.

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.