Artificial intelligence taking off in systematic investing strategies, APAC leads global peers in adoption

  • Invesco study reveals that the artificial intelligence (AI) revolution is already underway: half of systematic investors have integrated AI into the investment process and the majority (75%) expect AI to match or exceed importance of traditional investment analysis within a decade.
  • APAC respondents report highest use (50%) of machine learning/AI as a systematic investing methodology, versus 30% globally, 35% for North America and 12% for EMEA; investors from APAC and North America are more likely than EMEA-based investors to be using AI across the investment process.   
  • AI is mostly used to understand market trends and to optimize portfolio allocations; investors see potential in testing investment strategies and monitoring and adjusting trading positions in real-time.
  • Most investors believe systematic strategies helped them navigate challenging market conditions in 2022.
  • Systematic investing is evolving; investors are broadening their systematic toolkits by using more diverse strategies.
  • APAC investors led the way in incorporating ESG into their portfolios with almost universal incorporation (97% of respondents), 

Hong Kong, 30 October 2023 – Half of systematic investors have already integrated artificial intelligence (AI) into their investment process, according to the Invesco Global Systematic Investing Study (link here), which reveals a widespread expectation that AI tools will transform portfolio management in the years to come. The majority (62%) anticipate that, within a decade, AI will be as important as traditional investment analysis and 13% expect it to become more important.

The Invesco Global Systematic Investing Study is an evolution of the Invesco Global Factor Investing Study, published annually since 2016. The reposition this year reflects the changes within the quantitative investing world, and the use of quantitative methods beyond factors. The study, which is based on the views of 130 institutional and wholesale systematic practitioners’ that collectively manage $22.5 trillion in assets, also finds a growing consensus that the systematic toolkit can help investors navigate key challenges, such as volatile markets and imperfect data.

The AI revolution already underway, led by APAC and North America

Systematic investors are already using AI across a range of core functions.

Globally, respondents reported harnessing AI to better understand the market environment and identify macroeconomic turning points: 46% are using AI to identify patterns in market behaviour, and 38% are using it for portfolio allocations and risk management. Investors appreciate AI’s ability to help mitigate human biases and forecast the unexpected.

On a region-by-region basis, Invesco’s study found significant variations in attitudes towards AI and natural language processing (NLP), with investors in EMEA markedly more sceptical than their APAC and North America counterparts.

APAC investors were revealed to be the furthest ahead in utilizing machine learning and AI as a systematic methodology for portfolio construction.  Half (50%) of APAC respondents report utilizing such tools versus 30% globally, 35% among North American respondents and only 12% of EMEA respondents.    

Similarly, investors from APAC and North America are more likely than EMEA-based investors to be using AI across the investment process.  65% of APAC and 48% of North American investors use AI to identify patterns in market behaviour versus 33% of EMEA respondents; meanwhile, 35% of APAC and 20% of North American investors are using AI to monitor and adjust investment positions in real-time versus just 10% in EMEA. 

APAC and North America investors also led EMEA investors across every use of NLP in the investment process, including sentiment, news and risk analysis.  

Investors broadly expect the use of AI to grow significantly in the coming years. While a significant minority (29%) already use it to develop and test investment strategies, the vast majority (76%) anticipate doing this in future, and while 20% currently use it to monitor and adjust investments positions in real-time, more than half (55%) expect to do so moving forward.

APAC investors are the most convinced that AI will become more (20%) or equally (73%) as important as traditional analysis methods for the investment process within the next 10 years.  North America investors were similarly convinced that AI’s role will become more or equally as important as traditional analysis, contrasting markedly with the majority of EMEA investors (51%) who believe that AI will still be less important than traditional analysis methods in ten years’ time.

“Many Asia Pacific investors developed and matured more recently than peers in EMEA and North America, so it’s possible that they have a bit more organizational flexibility and dynamism to work with new tools such as AI and NLP in the investment process,” said Andre Roberts, Melbourne-based Senior Portfolio Manager in Invesco Quantitative Strategies.  “This is still a rapidly developing area of systematic investing, so I expect the gap in AI adoption between the regions to close as practitioners become more comfortable with these tools.”

In examining the benefits and challenges of implementing AI into systematic strategies, wholesale distributors identified improved risk management as the main benefit (76% of respondents), followed by the flexibility to adapt to changing market conditions (65%). However, challenges remain; wholesale respondents cited the cost of implementation (64%) and the complexity and interpretability of AI models (61%) as the main obstacles to adoption.

Institutional investors instead see accurate and timely insights (78%) as the most compelling benefit of AI, followed by improved risk management (74%) and increased efficiency and automation (68%). Their primary concerns are complexity (78%) and data quality and completeness (51%).

The growing systematic toolkit helps investors tame markets

Factor investing has historically been the cornerstone of systematic investing, but Invesco’s study reveals a far larger toolkit of systematic strategies that have helped investors navigate the key challenges of recent years.

Tools to decipher the macroeconomic environment have become especially important, and the ability of systematic approaches to help mitigate market risks was a key theme in this year’s study: the majority (63%) of investors agreed that systematic strategies helped them manage market volatility in the past year. Moreover, nearly 60% of respondents said that the new higher inflation market regime was supportive of the systematic approach, with only (6%) of institutional investors and (10%) of wholesale investors disagreeing.  

For three-quarters of respondents, dynamic asset allocation has become a core component of their approach, helping them to rebalance and adjust their portfolios in response to the market environment. Systematic tools have helped investors identify and characterise the underlying macroeconomic regime, allowing them to make inferences about its impact on different asset classes, factors, regions, and sectors.

“In recent years, markets have frequently been described as ‘unprecedented’ and acutely challenging to navigate, with each year becoming somehow more complex than the prior one,” added Andre Roberts.  “It’s notable that despite this increasing complexity, investors are not abandoning but rather evolving and refining their systematic approaches to meet these new challenges.  At the same time, systematic managers know their risk management and diversification works through the cycle, helping ride the bumps presented in volatile markets. This represents a strong vote of confidence in the future of systematic investing.”

Bridging the ESG data gap

The usefulness of systematic approaches is not limited to the macroeconomic picture.  Respondents have commended systematic strategies as an antidote to the challenges around ESG, particularly bridging the ‘data gap’.

Invesco’s study found around two-thirds of respondents are using systematic strategies to incorporate ESG into their portfolios, and systematic tools have become useful for helping investors decode ESG variables and metrics, which can have a meaningful impact on performance.

APAC investors led the way in incorporating ESG into their portfolios with almost universally incorporation at 97% of respondents, ahead of EMEA at 94% and North America at 61%.  According to APAC respondents, the top advantages of using a systematic approach to applying ESG were improved performance (90%) and improved risk management (83%). 

Around half of respondents agree that systematic investing can help to apply ESG when data is scarce, and many noted that they were using systematic tools to reconcile the inconsistencies between ratings agencies and develop company scores from raw data.

“Just a few years ago, ESG analysis and integration into the investment process was broadly unheard of in APAC.  The transformation we have seen among the regions’ investors is nothing short of remarkable,” commented Andre Roberts.  “A confluence of factors has driven this take-up, including regulatory change, popular sentiment and a recognition of the performance and risk management impact of ESG incorporation.  And of course, there has been the demand from clients and end investors, many of whom include ESG outcomes in their investment objectives.  ESG integration is likely to remain a core component of systematic strategies moving forward with increasing sophistication and capabilities.”

Beyond traditional asset classes and factors

Invesco’s study also found a growing consensus that the systematic approach can be applied across a broader range of asset classes than previously thought.

Systematic models are now well-embedded within fixed income and equities, but higher yields, coupled with a shift from quantitative easing, has meant that conventional macroeconomic considerations have returned to the fore in determining returns across various countries and sectors. This has boosted the appeal of systematic strategies for commodities and currencies: while only a quarter currently target commodities this way, 59% view this as a focal point moving forward.

The new macroeconomic environment has also prompted investors rethink conventional wisdom about what constitutes a factor.

Notably, four in five respondents now recognise ‘growth’ as a standalone factor, challenging traditional academic views which contended that ‘growth’ was difficult to define precisely. Investors do not see growth as the opposite of value, or vice versa; rather, as distinct and in some cases complementary factors, as evidenced by the rise of nuanced and blended factors like ‘growth at a reasonable price’.