Systematic vs fundamental equities: why can’t we have both?

By James Damicoucas, Institutional Distribution Director, Australia

In recent times, systematic listed equity strategies have gained significant traction. Often viewed as a cost-effective way to access active risk and harvest specific premiums, they have become a staple in many institutional and wholesale portfolios.

However, during recent industry discussions and roadshows, common questions have surfaced among asset allocators: “How much exposure to systematic strategies is too much?”, and “What is the optimal role for fundamental active management?”

Rather than viewing these two approaches as mutually exclusive, many investors are exploring how they can be blended. When considering systematic and fundamental strategies, the question is increasingly becoming: “Why can’t we have both?”

Here are three key themes emerging from recent client conversations regarding how these two styles can coexist to build more resilient portfolios.

1. Managing overall portfolio factor biases

A core tenet of systematic investing is the structured identification and harvesting of long-term market factors (such as value, quality, or momentum) to deliver outperformance.

While this is a highly disciplined approach, asset allocators are increasingly looking at whether a heavy systematic allocation unintentionally duplicates factor biases held elsewhere in the broader portfolio.

For example, many systematic models currently tilt toward "momentum." Given the dominance of global mega-cap technology and AI themes over the past few years, an investor's broader portfolio may already be highly exposed to these exact same drivers. Incorporating fundamental strategies can help smooth out these biases, providing a discretionary overlay that assists with overall portfolio balance and factor diversification.

2. Fundamental does not always mean high active risk

One of the primary drivers behind the shift toward systematic listed equities is their tracking error profile. These strategies are often structured to keep tracking error relatively low, reducing the dispersion of outcomes relative to a benchmark.

Conversely, there is a common perception that fundamental strategies are inherently concentrated, high-conviction strategies that carry high tracking error. While high-conviction fundamental strategies certainly exist, fundamental management is not a monolith. Many fundamental managers run diversified portfolios designed to operate with lower tracking error profiles—comparable to those of systematic strategies — offering a different path to benchmark-aware risk management.

3. The power of narrative in stakeholder communication

Communicating investment performance and portfolio positioning to stakeholders, boards, and end-investors is a vital responsibility for investment decision makers.

Because systematic strategies rely on sophisticated quantitative models, explaining performance often comes down to discussing complex model mathematics, factor exposures, and algorithmic mechanics. These are complex discussions which are hard for people less familiar with the strategy to understand, and even harder for them to explain to others.

Fundamental strategies, by contrast, are built on deep, bottom-up research of specific companies. Having a qualitative stock story that describes why a business was bought or sold can be an invaluable tool for stakeholders to simply explain performance to their own stakeholders or end investors. Humans innately love, understand and remember stories. They help demystify portfolio performance and translate complex market movements into tangible, real-world business outcomes.

The wrap

Ultimately, the debate between systematic and fundamental management does not need to be binary.

Rather than seeking to replace one with the other, the most robust portfolio construction frameworks often view them as complementary engines. By blending the systematic capture of market factors with the deep, bottom-up insights of fundamental analysis, investors can achieve a more diversified, balanced equity portfolio that is easier and more compelling to explain to stakeholders.