Systematic investing
Sitting between pure passive and active investing, systematic investing can offer a middle ground between the two.
Key Takeaways
Systematic investing is an active, rules-based investment approach.
These rules focus on performance indicators and are applied across a fund’s investment universe in order to enhance returns or manage risks.
Combining different types of investment strategies, such as discretionary active and systematic strategies, can help us build diversified portfolios that balance costs with the potential for improved outcomes.
Historically, most investors have had two options.
On the one hand, choosing investments to buy and sell. They look to find value in underappreciated companies or use their expertise and judgement to pick future winners.
On the other hand, you have passive (or index) funds, which aim to replicate their target market as closely as possible.
Each approach has its own pros and cons, and we believe both have a role to play in a well-diversified portfolio.
What Makes Systematic Investing Different
Systematic funds are active because their goal is to outperform a benchmark over time. Yet they achieve this through a fundamentally different process than traditional discretionary managers.
Instead of relying on individual manager intuition or "high-conviction" stock picks, systematic strategies apply transparent, repeatable rules (often powered by algorithms and quantitative models) across a broad investment universe. These rules are based on measurable performance indicators and are back-tested rigorously using historical data.
Common examples include:
Value: Favoring stocks that appear inexpensive relative to fundamentals (e.g., low price-to-earnings or price-to-book ratios).
Momentum: Tilting toward companies with strong recent price performance, based on the tendency of trends to persist.
Quality: Selecting firms with stable earnings, strong balance sheets, high profitability or low debt.
The fund then systematically rebalances: increasing exposure to securities that score highly on these criteria and reducing (or avoiding) those that score poorly. This creates a deliberate "tilt" toward attributes that have historically been associated with long-term outperformance, while maintaining broad diversification.
Because the process is rules-based and scalable, many systematic strategies share attractive features with passive investing: wide holdings across hundreds or thousands of stocks, lower turnover in some designs, and significantly lower fees than traditional high-conviction active funds.
From Simple to Sophisticated
Systematic investing is not a one-size-fits-all category. Strategies vary widely in complexity:
Simpler approaches use well-established, publicly available data to construct straightforward factor tilts (e.g., pure value or quality screens). These are often transparent, cost-efficient, and easy to understand.
More advanced strategies incorporate teams of data scientists, proprietary datasets, alternative data (such as satellite imagery or sentiment analysis), machine learning, and complex algorithms. These can capture nuanced signals and adapt dynamically but typically come with higher costs and a broader range of potential outcomes.
In all cases, human expertise still plays a vital role—designing the models, validating signals through rigorous research, and overseeing risk controls. Systematic investing is not a "black box"; the best approaches emphasize transparency and evidence-based decision-making.
Combining both Approaches
There is no single "right" way to invest. Different strategies shine in different market environments:
Passive funds deliver low-cost market exposure with high reliability.
Discretionary active managers can add value through deep fundamental insights, especially in less efficient markets or during periods of high uncertainty.
Systematic strategies often provide consistent, unbiased exposure to rewarded risk premia, strong risk management, and diversification benefits because their excess returns tend to have low correlation with those of traditional stock-pickers.
Blending all three can help investors build more resilient portfolios: capturing broad market returns efficiently while seeking targeted outperformance and better risk-adjusted results. Many institutional investors now allocate across discretionary and systematic active sleeves precisely because the two styles frequently complement each other, reducing overall portfolio volatility without sacrificing return potential.
Systematic investing represents an evolution in active management, one that harnesses the power of data, discipline and technology to pursue enhanced outcomes in a repeatable way. It doesn't replace discretionary judgment or pure indexing; instead, it adds a powerful third dimension to portfolio construction.
For investors seeking a balance between cost control, diversification, and the pursuit of long-term alpha, systematic strategies deserve serious consideration as part of a well-rounded investment approach.
If you need support in understanding the different types of investment strategies and what's best to achieve your financial goal, contact us today.