If your participation – both upside and downside – comes from active fund managers then now, at another inflection point, might be the best time to reassess their talents, more specifically if their style suits the prevailing market conditions.
Getting to grips with a manager’s style today is not as easy as it once was. Gone are the days when investors were loud and proud in following Thomas Rowe Price or Ben Graham in a growth or value approach.
Nowadays it’s all about a blend of styles, such as growth at a reasonable price (GARP), although managers have a tendency to dislike taking on specific labels for fear of accusations of style drift.
“Most fund managers who want to stay employed and want to keep investors aboard long enough that they receive strong overall returns are in fact pragmatists,” says Nick Sketch, senior investment director at Investec Wealth & Investment.
Beware the index huggers
“They will look at the index shape whether they admit it or not, which may explain why so many have so much of their portfolios invested in index majors. Also, if your style is not working, it can make sense to cut the tracking error, hug the index for a while and calmly reconsider from a position that is bland rather than dangerous.”
Of course, no manager wants to be accused of being an index hugger. For Anthony Cross, co-manager of Liontrust Special Situations Fund, it is in turbulent times like this that stockpickers need to go “back to basics” in assessing whether stocks have the strong barriers to competition and the pricing power that, in the long term, can enable them to grow.
“I do not believe in the crude categories of being a growth or value manager; we are all trying to buy good value,” he asserts.
“Some of our companies are recognised because they are growing in the short term and will probably have a higher valuation. Some are good companies in the medium or longer term, but they have shorter-term issues, and therefore will be undervalued.
A question of research
“Some of our small companies are undervalued because they are just not very well researched, and that is a nice area where you do find companies which are on low valuations but are growing quite happily and will eventually get recognised by the stock market or will get taken over.”
So there we have it, the successful modern stockpicker should be pragmatic with a back to basics approach that does not easily dismiss a company just because of its valuation. Hardly exciting, but it might just be the message investors want to hear this summer, especially those hurt by previous momentum bubbles.
I’ll explore growth and value investing in greater detail in the September issue of Portfolio Adviser, out soon.
