Systematic investing refers to rule-based investment strategies that make portfolio allocation decisions according to predefined rules and algorithms instead of relying on human judgement. There are various ways to implement systematic investing strategies across different asset classes such as credit, fixed income and equity mutual funds. This article compares the key characteristics of applying systematic investing principles to credit, fixed income and mutual funds.
Implementing systematic credit investing strategies
Systematic credit investing aims to leverage quantitative models and rules to select individual corporate bonds or build diversified credit portfolios. It can help address concerns over liquidity, transparency and credit analysis resources in the fragmented corporate bond market. Key considerations include identifying value signals among corporate bonds based on credit fundamentals, controlling risk factors such as duration and industry concentration, and maintaining adequate liquidity.
Applying systematic rules in fixed income investing
Similar to systematic equity investing, fixed income portfolios can also be constructed systematically based on allocation rules across factors such as duration, credit quality, geography, currency and sector exposures. Systematic fixed income strategies often hold a diversified portfolio of government and corporate bonds while dynamically adjusting exposures to various risk factors.
Systematic mutual fund investing based on rules
Passive systematic mutual fund investing usually tracks market capitalization weighted equity/bond indices. However, factor-based, equal-weighted or fundamentally weighted index mutual funds and ETFs allow investors to gain systematic exposures according to prefered factors other than market capitalization. Overall, systematic mutual fund investing strategies are easy to implement but have limited flexibility.
In summary, systematic investing based on rules and models can be applied across various assets including credit, fixed income and equity mutual funds. Investors should compare their risk-return objectives, liquidity needs and desire for transparency and flexibility when choosing systematic strategies.