Investment Model



Systematic investment becomes mainstream

Systematic methodologies are rules-driven processes referencing or tracking indexes that come with particular risk and return characteristics. Their higher-technology element tends to lower costs and requires lower governance in their application. These approaches are increasingly attractive in lower-return and higher-complexity times and increasingly become core mandates.


  • Systematic investment methods include passive cap-weighted mandates—the largest category—as well as factor-based portfolios, smart betas, and quant strategies (see Giamouridis 2017).
  • Increasingly, systematic allocations with a large preponderance of cap-weighted indexing are used as a principal core allocation in core-satellite structures. This approach remains widely favored in investment vehicle structuring because it helps in top-down risk management by enabling simple re-weightings of risk allocations to occur as market and client circumstances change.
  • Systematic mandates are delivered through different vehicles, with exchange-traded funds (ETFs) the fastest-growing segment at around $4.7 trillion in global allocations at year-end 2017. ETFs have grown at rates around 20% per annum since 2010 and are quite likely to grow almost as fast in the coming 5–10 years (according to The transparency of both portfolio holdings and also the strategy that applies in the ETF model is attractive.
  • These approaches by design have relatively low costs and simplified governance, and so should attract the attention of most investment firms. The governance advantages are that systematic approaches are highly transparent in explaining how the underlying strategy is expected to perform, and monitoring the investment process and performance of index portfolios is relatively simple.
  • The next 5–10 years will see further evolution in the balance of cap-weighted indexing (“passive”) and mandates seeking alpha (“active”) in which these factors apply:

    • Current cap-weighted indexing market share is variously seen as currently around 20%–30% for global assets but is set to grow in the next 5–10 years.
      Because the cap-weighted indexing approach invests proportionately in line with investment opportunities, the investment methodology enables investors in current circumstances to buy the index portfolio in size without the likelihood of significant price distortion or liquidity difficulties.
    • When cap-weighted index investing grows to higher proportions (for example, more than 50% market share versus active investing), however, it can introduce a theoretical vulnerability of the system to inefficient pricing of stocks relative to their fundamentals, which could be negative for the overall health of the financial ecosystem.
    • This vulnerability could present the opportunity for active managers to exploit such anomalies if the market becomes excessively driven by passive flows (suggesting some counterbalancing active flows).
    • Industry perspectives should settle on active and passive being complementary in providing choice as part of a continuum of styles in which diversity is positive for market health.
  • CFA Institute member survey respondents were asked about the impact of cap-weighted indexing (passive) for end clients in the next 5–10 years: 52% say the impact would be positive, 29% say it would be neutral, and only 19% say it would be negative.
  • Factors remain an area of innovative thinking in the investment model. Expectations in this narrative are for greater use of complex multi-factor and multi-asset approaches, which increase the variety of approaches. The range of possible options is appealing to asset owners that have often been confined to single strategies. It is also likely that the factor template will be applied to ESG characteristics and other thematic tilts.