Systematic Core Macro – Reacting incrementally to changes in market conditions while dynamically managing risk
December 2023
Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024
Systematic investing has seen renewed interest in recent years, against a backdrop of lacklustre performance from traditional 60/40 portfolios. Notably, systematic trend-following styles performed extremely well in 2022, boosted by strong trends across grain and energy markets in the wake of the invasion of Ukraine, and also from the ability to benefit from sustained declines across equities and fixed income. Many trend- following managers struggled in 2023, with the sharp market reversals in March following the collapse of Silicon Valley Bank proving difficult to navigate. However, other systematic approaches, such as those incorporating value or carry strategies, have fared much better this past year.
Making direct predictions or speculating about future markets behaviour is somewhat antithetical to the systematic investment approach, as a robust systematic framework will attempt to position itself in line with market developments to take advantage of likely investment opportunities as and when they occur. However, with this in mind, looking forward to 2024 we think many of the key themes driving markets in 2023 will stay relevant. The ongoing Russia-Ukraine conflict and the continued tensions in the Middle East are likely to result in persistent volatility in energy prices. Similarly, the macroeconomic outlook remains uncertain and central bank monetary policy we believe will continue to have a significant impact on the outlook for fixed income and equity markets, especially as we move to the end of the year with a common theme of ‘higher for longer’ across most major economies. These uncertainties and the resulting volatility in underlying markets generally favour the strengths of a systematic approach, which can react incrementally to changes in market conditions, while dynamically managing the risk profile of the portfolio.
As systematic investors, one feature that we monitor closely is the degree of concentration prevalent across the markets in which we invest. We believe a more diversified universe will provide more independent trading opportunities for the portfolio, which should generally lead to higher expected returns. One way in which this can be visualised is to look at the number of independent factors present in the returns of a set of markets. This is shown in the chart below for the 10 most liquid commodity markets, which encompass energy, metals and agricultural markets. During periods of macro stress, for example during the onset of the Covid epidemic or the invasion of Ukraine, the number of independent factors can reduce as they diminish, and markets behave more alike. Going into 2024, we believe this asset class will present a much more diversified opportunity set.
Number of independent factors driving the returns of the 10 most liquid commodity markets
Source: GAM Systematic
Another important factor in the outlook for systematic strategies is the elevated cost of funding. The current interest rate environment poses funding challenges for traditional investments, which are typically highly cash intensive, causing a drag on the excess returns. Conversely, this often will not be the case for strategies, such as systematic macro, that primarily invest in derivatives. These are typically paid on margin, with the majority of assets in the portfolio held in cash or other liquid instruments that will benefit from the increased risk-free rate.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.