What do we mean by ‘systematic investing’?

At a glance

• 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 putting their money into a fund have had two options.

On the one hand, discretionary active funds see managers 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. We can combine the two in our investment solutions, while also using options that sit somewhere between them. One of these options is active systematic investing.

Between two poles

Systematic funds aim to generate higher returns than their benchmark. As a result, they are a form of active investing. However, they approach this goal in a different way to traditional, discretionary active funds.

Rather than a manager picking and choosing what to buy and sell, these funds will apply a set of rules across a given index.

For example, a systematic fund might have rules around considering a company’s value, how fast a company is growing, or what a company’s past performance has been.

Funds will automatically adjust their holdings based on these rules, increasing the amount held in certain companies, while reducing holdings in others. This will give the fund a tilt towards certain investing attributes with the aim of delivering long-run outperformance.

While being active in nature, certain systematic funds can have features that are similar to passive funds – such as being broadly diversified and typically lower cost.

Explaining how we can use these funds, Dr Sarah Ruggins, Head of Investment Specialists at SJP, says: “These funds go slightly beyond just replicating the market. By seeking to exploit indicators of performance in a transparent, rules-based way, these funds aim to deliver returns in excess of simple passive solutions.

“That said, for many active systematic funds, you will often only see a modest divergence from their benchmark. This means that your range of outcomes should vary only modestly from the market return.”

Broad church

Applying these rules across markets continuously requires the use of algorithms or decision rules.

There can be a significant differences between different funds depending on the complexity of the strategy.

In some cases, the strategy could be relatively simple – relying on readily available data to generate straightforward factors (such as value or quality) that can be then applied across the fund’s investment universe.

In other cases, teams of analysts and data scientists will look to feed bespoke data and insights into an algorithm, resulting in a more sophisticated approach.

More sophisticated approaches will likely see a wider range of outcomes and come with a higher cost:

In reality, there are a range of investment approaches available. There is no right answer. Different approaches will have their own pros and cons depending on your aims and goals.

As a result, we look to blend different types of funds from across the spectrum. Only this way can we create truly diversified portfolios and funds.

Sarah concludes: “Blending strategies allows us to combine the benefits of each. We can access the lower cost, diversified and scalable benefits of systematic strategies alongside the more distinctive but expensive approaches of discretionary active strategies. It also helps us to offset the individual limitations of each.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

SJP Approved 25/02/2025