“Systematic Alpha” Investing: Built on Rules, Not Market Forecasts
Tim Atwill discusses Parametric’s innovative “systematic alpha” investment approach, and its application to emerging-market and international equity investing. This is an excerpt from a paper published in June 2016.
Q: WHAT IS “SYSTEMATIC ALPHA” AND HOW DOES IT DIFFER FROM OTHER STYLES OF INVESTING?
Atwill: Asset management has traditionally been split into two arenas: active and passive. With active, a portfolio manager attempts to outperform a given benchmark. Views on individual securities are typically developed through fundamental research or quantitative techniques, and these views are generally reflected in portfolio positions that often deviate from the stated benchmark. In contrast, passive managers attempt to match a benchmark’s performance by holding relatively static positions and minimizing transaction and operational costs.
With systematic alpha, Parametric has pioneered a third style of that falls in between passive and active management. Systematic alpha relies on three basic tenets:
- Outperformance is sought via the structure of a rules-based portfolio.
- Portfolios are built to emphasize diversification with no fundamental views expressed at the individual securities level.
- Portfolios are constructed in a transparent fashion.
Simply put, we aim to generate alpha by tempering volatility through a combination of portfolio rebalancing and diversification. In addition, by limiting portfolio turnover, our approach may help reduce the impact of market inefficiencies and lower transaction costs.