Systematic Investing: Recognizing What We Know—and What We Don’t

Quantitative investment processes may appear as a “black box” to potential clients—opaque, complex, and difficult to understand. This perception may cause allocators to be concerned that purely quantitative models could overlook critical real-world developments or fail unpredictably under certain market circumstances.

Here at Bridgeway Capital Management, LLC (“Bridgeway”), for our absolute return strategies, we systematically grade stocks within our investment framework. This process emphasizes how we actively acknowledge and evaluate areas of uncertainty, demonstrating our strength in clearly identifying what we don’t know, cannot confidently measure, where there is uncertainty, or where we feel externalities threaten the assumptions underlying our models.  By transparently sharing how our methodology adapts to real-world conditions and uncertainties, we seek to reinforce trust, deepen client understanding, and differentiate our approach in the marketplace.

What is Systematic Investing?

Investing can often feel unpredictable, but at our firm, we take a disciplined, evidence-based approach to financial statement analysis. Systematic investing relies on methodically evaluating financial statements using models to remove emotion from decision-making. Rather than chasing trends or reacting to market noise, we use a structured process to assess investment opportunities, in an attempt to ensure that every decision is backed by rigorous analysis.

However, financial data alone is not enough. One of our greatest strengths is knowing what we know—and just as importantly, acknowledging what we don’t. External forces—such as regulatory changes, leadership shifts, or geopolitical events—can impact a company’s performance in ways traditional models can’t predict. That’s why we evaluate our model assumptions consistently and adjust for externalities, ensuring that our investment process remains both robust and adaptive.  After our computers calculate a numerical score for each stock in our investment universe, our investment team assigns a letter grade (A,B,..,F) to the most relevant investment opportunities for international and absolute return portfolios.

How We Adjust for Externalities

Our investment team continuously monitors externalities that can affect a company’s outlook. When we identify an event outside the prediction scope of our models, we adjust the stock’s rating to reflect increased uncertainty, recognizing that new risks or changes in conditions may not yet be fully understood. Specifically:

• A stock rated A (bullish) will be muted to C (neutral) if an externality introduces new risk that adds uncertainty to our conviction.
• A stock rated F (bearish) will be muted to C (neutral) if an externality suggests a potential improvement that we cannot yet quantify.

These adjustments are not about making predictions—they are about acknowledging that some events create uncertainty beyond what models can immediately measure. By tempering extreme ratings in response to externalities, we avoid overconfidence and endeavor for a balanced, risk-aware investment process.

Key Externalities We Monitor

We use advanced news screening tools from Bloomberg and FactSet to strive to identify impactful externalities in a timely fashion across several categories including:

1. Regulatory Shifts
   • Rapid changes in environmental regulations.
   • Government price caps impacting profitability.
   • Unforeseen tax policy adjustments.
   • Trading restrictions and currency repatriation limitations.
2. Leadership Transitions
   • Executive changes that can lead to market reaction.
   • Scandals or controversies affecting investor confidence.
3. Corporate Events & Actions
   • Stock splits, spin-offs, and special dividends.
   • Unexpected consequences of corporate takeovers
4. Geopolitical and Economic Shocks
   • Market volatility due to election outcomes.
   • Economic impacts of geopolitical conflicts and legal rulings.
   • Global disruptions from unexpected events.
5. Market Innovations & Disruptions
   • Regulatory decisions that can lead to sudden stock movements.
   • Supply chain shocks disrupting operations.
6. Insider & Government Activity
   • Insider trading leading to sudden market reaction.
   • Congressional trading activity that can move stock prices.
7. Other Unforeseen Market Forces
   • Social media-driven stock movements.
   • Emerging human rights concerns and legal challenges.

Why This Matters for Investors

While many investment firms rely purely on historical data and quantitative models, one way we differentiate ourselves is by systematically adjusting for real-world externalities. Our ability to recognize what we don’t know—and adjust accordingly—assists us in creating an investment process that is:

• More Risk-Aware – We strive to proactively temper exposure to external risks before they impact returns.
• More Adaptive – We don’t ignore real-world developments; we integrate them into our decision-making.
• More Intelligent – By balancing systematic rigor with real-world awareness, we seek to create a smarter, more resilient portfolio.

At Bridgeway, we go beyond traditional quantitative investing by evaluating externalities as part of our systematic investment process. This helps us with our goal to consistently deliver better risk-adjusted returns for our investors even in these unpredictable and volatile times.