Systematic investing is a disciplined strategy, founded on explicit rules and principles. Yet, like everything in asset management, it continues to evolve. Advances in computing power and artificial intelligence are driving change in processes and decision making. Quantitative techniques are being integrated into a wide array of strategies. This edition of Risk & Reward delves into these ongoing shifts.
For example, our colleagues have developed a cutting-edge tool for ESG monitoring that leverages Natural Language Processing (NLP) – a branch of AI that efficiently analyzes text. This tool reveals insights that a human reader might overlook due to biases or time constraints. Built on the premise that financially significant ESG controversies garner substantial media attention, the tool systematically analyzes news reports to identify the issues that really matter.
Next, we explore a classic theme in factor investing and a key feature of markets today: extreme concentration, particularly in the US, where a handful of tech mega-caps have come to dominate index composition and performance. Do you believe that quantitative strategies can’t adapt to the new normal? With the right tools, style factors can still thrive, even in highly concentrated markets. Discover what our experts have uncovered.
In addition, we feature an in-depth interview with three leading quantitative portfolio managers from Invesco. They share their views on the latest developments in the space and the changes brought about by theoretical advances, increasing computing power, sophisticated algorithms, artificial intelligence, and evolving client preferences.
We hope you’ll find this edition of Risk & Reward informative and inspiring.
Click below to read the featured articles within this edition of Risk & Reward.
An NLP-driven approach to controversy screening for sustainable investments
This ESG monitoring tool uses a dictionarybased approach to identify financially material controversies. Comparing its results with thirdparty assessments demonstrates the tool’s efficacy in capturing controversial practices that lead to significant stock price reactions.
Factors and equity market concentration
We examine the behavior of global equity factors in the context of increased equity market concentration and show how well-designed equity style factors can effectively diversify a portfolio.
Systematic Investing Evolving: tactical asset allocation, algorithms, and artificial intelligence
Systematic investing has been evolving. Over the past several decades, advances in finance theory, computing power, alternative data sources, and trading – alongside practical, real-world experience in applying quantitative methods to address investor needs – have expanded the use cases for systematic approaches within investment management. Once focused mainly on market and security forecasting methods, generally based on price and volume data, it then evolved to exploiting risk premia and financial anomalies.
Our 2023 Stewardship Report highlights our commitment to sustainable growth and responsible asset management, reinforcing our mission to prioritise long-term value.
Subtle differences in factor definitions can profoundly impact performance, and a crucial decision is whether to rely on a single or multiple factor signals. We present an approach that may help investors improve factor premiums by diversifying across signals and removing exposures to unrewarded risks.
Our tenth study covers 139 institutions from all over the world, and paints the clearest picture yet of the global state of the market, and what the future of sovereign investors could look like.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Data as of 31 July, 2024 unless otherwise stated.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
