Active Management Styles

In my last post I talked about the two ways you can access a portfolio of stocks with minimal effort. Today we’re going to take a deep dive into active management – more specifically investment styles.  (Yes finance can be stylish!)

So let's get straight into it.  Active fund managers have particular ways or styles of investing, which are broadly categorised into the following:

1)    Value

2)    Growth

3)    Core and;

4)    Low volatility or managed volatility.

Value

Value as the name suggests, is about picking stocks that are undervalued (i.e. cheap) that the market hasn't yet noticed, but have latent potential to rally. Often these are stocks that have suffered poor earnings, or have gone through cyclical issues. Here the skill lies in a fund manager’s ability to identify those companies that will eventually rebound, from those that will continue to underperform (i.e. avoid ‘value traps’).

Benjamin Graham is often credited as the father of value investing; his investment philosophy forming the basis of this the style which has been adjusted for today’s investing landscape.  

Growth 

Growth style managers tend to invest in stocks that are growing through earnings growth (where the company is improving its profit) or price momentum (stock price is rising).  Stocks chosen are typically names that are already loved by the market. "FANG" stocks which comprises of Facebook, Amazon, Apple, Netflix, Google are examples. 

In contrast to value style managers, growth style managers do not look for cheap stocks, in fact they don't mind 'overpaying' (to varying degrees) for proven growing stocks. It would be remiss of me not to mention that it is these FANG stocks that have driven the US markets to their highs (there’s plenty of new commentary on just how expensive US stocks are, especially in the Tech space).

Core

This is almost a bit of 'catch all', in that core managers will not look specifically for a value or growth stock, instead buying any stock that they like. Often these managers may have a quality bias, opting for companies that have strong balance sheets (cash rich with little debt), a long history of delivering consistent earnings and a strong competitive moat (think of companies that have a strong foothold in their market, often well known franchise businesses).

Low Volatility or Managed Volatility Stocks

This has been one of the more popular styles in the last few years. As the name suggests, the style is about investing in stocks that exhibit lower volatility. The rationale is that stocks that demonstrate slow and steady growth will tend to outperform over time, as they do not suffer periods of rapid drawdowns. This style of stocks has been the beneficiary of a great amount of fund inflows (due to its strong performance), with many worrying that this style will suffer with the record low interest rate environment coming to an end (a future post).

So why do we need to know about investment styles? Because

1)    The four different managers will outperform at different stages of the market cycle. For example, value funds tend to underperform in strong markets, but have a short sharp performance rally when markets are falling.  Equities markets have been on a steady growth path for around a decade now (yes there has been pockets of turbulence, but no sustained periods of market crash like the GFC), so is a correction drawing near? (more on this in a future post)

2)    When you compare the performance of fund managers, you should be comparing like for like. It’s like when you are buying a car - you wouldn't compare a Land Crusier to a Lamborghini (no I’m not talking about price, I mean ones a family car and the other is a sports car).  You should also be aware of managers that label themselves a particular style but actually invest differently. 

A good balanced portfolio will often have a mixture of styles, allowing you to hedge your bets because – let’s face it, who knows with 100% certainty what market phase we are in?