With 1,480 shares, the MSCI World Index tracks the largest listed stocks in developed countries. This large number of companies makes it almost impossible for fund managers who rely on a fundamental investment process to analyse all stocks in detail. For this reason, a large number of securities are usually excluded at an early stage based on various criteria.
Differences to the systematic investment strategy
In contrast to the fundamental investment strategy, a systematic approach continuously assesses the entire investment universe according to certain criteria. Stock picking is usually carried out by an algorithm based on a certain scheme and free from any psychological influences. A database, which forms the core of the stock selection, is absolutely key.
In a systematic strategy, a so-called rebalancing is usually carried out at regular intervals, in which the stocks in the portfolio are exchanged to a predefined extent. In principle, the number of shares is determined by the defined tracking error (deviation of a portfolio's performance from its benchmark) of the respective strategy. A lower tracking error requires a larger equity universe compared to a higher tracking error.
Factors are subject to cycles
When developing systematic strategies - in this case factor strategies - it is worth taking several factors into account in the model. In Zürcher Kantonalbank's asset management, these are "value", "momentum" and "quality". The advantage of such a multi-factor strategy is that although many factors have historically been able to generate alpha over a sufficiently long period of time, they are still subject to cycles. This is partly due to the short-term thinking of many investors, which in turn leads to inflows and outflows that influence relative valuations and therefore future returns. Multi-factor strategies can mitigate these cycles to a certain extent. The following chart illustrates the cyclicality of the three styles "Momentum", "Value" and "Quality" in the US market.