This article was produced in partnership with Macquarie Asset Management.
Consistent returns are the holy grail of investing, enabling investment managers to bolster portfolios in times of challenging market conditions to provide stability.
This challenge has brought a renewed focus on systematic investing, which has the potential to offer the consistent returns needed to maintain healthy investment portfolios.
Systematic (or quantitative) investing is a data-driven approach that combines behavioural science, finance and economic data with human intelligence. Its rigorous and repeatable model aims to deliver consistent financial outcomes above the index.
This investment type has a long history in the listed equity market, with billions invested using systematic principles, making it a well-established method of investing.
Historically reserved for institutional investors, these actively managed systematic strategies can now be easily accessed via listed funds on the Australian Securities Exchange.
Recognised by the industry as a useful tool during periods of market volatility, systematic investing can be considered a key driver of consistency across all market conditions. While considered too complex for everyday investors to replicate themselves, systematic investing has the potential to deliver above average returns by relying on a rigorous combination of data science and human intelligence.
Applying a systematic approach to investing requires constant monitoring and adaption that responds to the data and opportunities in the market. It requires deep expertise in a number of disparate domains in finance and data science, where teams of experts with the focus and knowledge can do what they do best.
| Benefits of systematic investing |
| Advanced technology enables faster data processing, essential for real-time decision making |
| Technology allows for scalable solutions like cloud computing that can handle massive data volumes |
| Enables complex mathematical models such as machine learning and artificial intelligence to be deployed, which leads to deeper insights |
Source: Macquarie Asset Management.
Democratisation
Historically, institutional investors have been the main segment of the market able to objectively evaluate the risk and benefits of the systematic approach against other investment strategies.
Due to the significant capital investment required to create, operate and maintain a systematic process, institutional investors were the only client segment with the size of assets able to support and invest in such strategies.
However, just like the democratisation of computing power from mainframe computers to desktop to laptops and then smartphones, everyday investors can now access this investment category through ETFs or unlisted funds.
This year, Macquarie added two active ETFs to its range designed to provide exposure to this unique investment capability. It’s an investment approach that removes emotional biases, which is incredibly difficult to achieve on a discretionary basis, explains Macquarie Asset Management Head of Systematic Investments Benjamin Leung.
Leung is an experienced investment manager and has deep understanding of the power of combining technology, artificial intelligence and human intelligence.
Systematic investing uses data to uncover the complete set of investment opportunities available, in real time, unbounded by human attention, preferences or biases. It also benefits from advances in technologies and the continual evolution of the systematic approach as it learns and grows with market experience, Leung explains.
“Successful application of systematic investing techniques require processing massive amounts of financial data, which will overwhelm everyday investors without sophisticated infrastructure, extensive technology support and capital investment,” Leung says.
Successful systematic investing involves managing the interaction of investment fundamental data and technology.
“The models that drive systematic investing builds on well established investing principles with advanced statistical and mathematical techniques, making them challenging for everyday investors to replicate.”
It’s an approach that matches institutional investors’ need for consistency, strong risk management and clear value and fee proposition.
“The fiduciary duties of institutional investors and long investment horizons mean they are motivated to invest the time and resources to uncover the investment approach that best meets their needs,” Leung says.
Black box concept
While accessing this investment strategy has been a challenge for some investors, it’s a misconception that systematic strategies are a black box. “This style of investing is often perceived to be a black box because of the number of steps involved and the complexity, along with the level of expertise required to unpack the intuition behind the process and the proprietary nature of the end-to-end process,” he says.
In reality, systematic investing is a series of highly logical, rigorous and transparent decisions that converts data into clever insights, enabling investment managers to build a rigorous portfolio. This in contrast with discretionary investment decisions, which are prone to narratives, stories and biases.
Macquarie’s approach
For more than three decades, Macquarie has continuously refined its techniques, for systematic investment, evolving the process with market experience every step of the way.
“The longevity shows Macquarie’s commitment to the investing style and our success in overcoming different market conditions,” Leung says.
“Investors today can leverage from our extensive track record and data sets built up over time.”
Each step of the investment process is calibrated and aimed at maximising the chance of delivering excess returns and reducing the variability in the outcome. And when it comes to compounding, the difference adds up, he says.
The process is then consistently and objectively applied guarded from emotion and biases, implemented with deliberate position sizing, consideration of risk and turnover, all carefully calibrated and researched.
Systematic investing is also an investment philosophy that adapts over time to the evolving market conditions and is less impacted by market optimism or pessimism. While using technology to assist in the investment selection process sounds like a hands-off approach, that’s not the case at all, Leung says.
“Systematic investing is not a set and forget approach.
Leung says: “To maintain a systematic model’s investment edge, quantitative researchers need to constantly improve the process with new data and techniques. It’s incredibly important that a systematic manager constantly evolves along with market changes and technological advancements.”
