Systematic investing is on the rise: APAC implications

Global equity markets have become more concentrated in recent years, largely fueled by the rapid growth of US mega-cap tech companies. This trend has prompted investors to diversify their portfolios and explore systematic investing strategies that inherently offer diversification. Systematic investing involves incorporating data-driven, rules-based quantitative models and algorithms to make investment decisions and build portfolios. A growing cohort of investors are exploring the potential of systematic strategies to manage risk, identify opportunities, and optimize returns across various market conditions.

This piece delves into the factors driving the rise in systematic investing and the various trends occurring in this space. We leverage on the findings of our latest Global Systematic Investing Study to illustrate these trends. The 2024 study interviewed 131 systematic investors¹ responsible for managing $22.3 trillion in assets (as of 31 March 2024).

High levels of concentration in the stock market, particularly among major tech players, have raised concerns amongst investors reminiscent of previous market cycles (such as the 1999/2000 tech bubble). Investors are proactively positioning themselves ahead of a potential mean reversion in market dynamics. We believe early adopters of systematic strategies have already begun to reap the rewards of this shift, finding success in diversifying their holdings.

Traditional approaches to multi-asset portfolio construction typically relied on strategic asset allocation based on long-term expected returns and correlations, combined with periodic rebalancing. The rapidly changing market environment has exposed the limitations of these static approaches. Instead, investors are now adopting value investing strategies as a counterbalance to growth-heavy allocations dominated by tech exposure (Figure 1). This is reflected in the evolution of investors’ portfolios, shifting towards more dynamic asset allocation models.

We are seeing an increasing number of investors leveraging traditional factor exposures within their dynamic asset allocation models. Nearly all surveyed investors recognized the value of this approach (98%), particularly as performance evaluations are increasingly conducted over shorter time horizons (Figure 2). This adaptability is crucial in today’s fast-paced market environment.

In the Asia Pacific (APAC) region, investors are leading this trend, with over 90% of those surveyed adopting systematic equity exposure in their asset allocation strategies. This proactive stance underscores a broader regional commitment to diversifying investment approaches.

Investors are also broadening their scope beyond traditional asset classes like equities and fixed income and turning to systematic strategies within alternative investments such as commodities and real estate. 

In the commodities space, systematic strategies are gaining traction as a method of diversifying portfolios of stocks and bonds while providing protection against potential inflation risks. As economic conditions remain uncertain, the ability to hedge against inflation has become increasingly valuable.

In real estate, systematic strategies offer a way to replicate exposure that was once reserved for illiquid investments. This innovation is particularly advantageous for liquidity-constrained investors, enabling them to construct precise solutions that allows them to quickly adjust for changing macroeconomic conditions.

The rise of artificial intelligence (AI) and advanced data analysis techniques is playing an increasingly pivotal role in investment decision-making and portfolio analysis. While traditional sources of data remain important, the integration of alternative data sources is becoming essential for investors looking for a competitive edge.

Investors looking for education on alternative data analysis is also on the rise as they strive to better understand trends and identify opportunities. In this context, APAC investors are notably ahead of their global counterparts, with those surveyed being around two to three times more likely to extensively utilize AI in their investment processes (Figure 4). 

This regional trend reflects a strong belief among APAC investors that AI will increasingly replace traditional analytical methods at a faster pace than in other regions. We believe ongoing advancements in AI-driven investment strategies will shape the future of investing, particularly in the APAC market.

As market dynamics evolve, the rise of systematic investing is being driven by a confluence of factors including market concentration, the search for diversification, and the integration of advanced technologies like AI. Investors are embracing systematic strategies not only in traditional asset classes like equities but also in alternative investments. As these trends continue to unfold, we think systematic investing is likely to play an increasingly central role in portfolio management in the coming decade.

With contributions from Monica Uttam, Thought Leadership and Insights, Asia Pacific