Does your investment style suit you?
As with every other season, there will be those pieces that will stand the course of time as well as those which will be on your doorstep in a year’s time as you wonder what you were thinking.
It is not just the fashion houses that have their favoured styles. The City also has its own style preferences and the staples which will never go out of fashion, the classic cuts in black and white within the world of investment. However, the financial world also likes to jazz up its style every so often in order to find a new take on a classic. What you have to do is ensure that the investment style you chose to invest in stands the length of time.
Value investing is a style based on a belief that the market has inherent inefficiencies which means companies sometimes trade at levels below their true value. The value investor buys in the hope that eventually the stock will be re-rated as others wake-up to its worth. A value investor is like someone who trawls through charity shops and sale lines, in order to find bargain items which others will later complement them on. While some value investors look for relative bargains, others take an outright contrarian investing approach, targeting those areas deeply out of favour by the market and either biding their time until they come back into fashion or spotting some form of catalyst for a turnaround.
On the opposite end of the spectrum but just as classic encapsulating the little black dress, is the little racier growth-investing style. This is focused on picking companies that are going places and has the wind in their sails. It is a belief in their future, rather than a focus on their value, profits or dividends today. Growth funds offer higher potential capital appreciation, however in turn they often also carry above-average risk.
Incorporating both these styles into a monochrome ensemble is GARP – Growth at a Reasonable Price. GARP investors looks to invest in companies that show consistent earnings growth above average market levels, however excludes stocks where valuations look stretched. Its aim is to avoid the extremes of growth or value investing and is ultimately pragmatic.
Absolute return funds are most like those capsule pieces that are never wildy out of fashion, classic cut jeans and well-tailored jackets, as there is always an occasion for them and can be worn in every season. The main objective of an absolute return fund is to seek positive returns through the good times and the bad by employing advanced risk management techniques to deliver consistent returns.
Index tracker funds, or passive-investing is an approach to replicate the general ups and downs of a market index at low costs. These are investments for those who like to follow the crowd, rather than set new trends, buying what is currently popular on the high street but unlikely to stray to the more risqué and eye-catching high-end (and more expensive) fashion items found on the catwalk.
Thematic investing is all about the big picture, trying to identify the major trends of the future that will create investment opportunities, and pursuing these within a portfolio. These might include demographic trends, the impact of new technologies or regulations. As these funds are often focused on a specific theme they are often launched when interest gathers prominence. These funds are the new season trends, the pieces that are seen coming down the catwalk. As such the funds, as with the fashion, can risk being faddish and may not stand the length of time to become a reliable staple.
When looking to expand your portfolio, as with your wardrobe, you want to ensure you have capsule staples on which you are able to build from, and be aware the pompoms or septum piercings which may be on the catwalk this week but may be in the bin within six months’ time.
Examples of managers with strong style bias:
George Godber, manager of the CF Miton UK Value Opportunities fund, is a “deep value” investor who trawls the UK market capitalisation spectrum, seeking to identify companies that are trading at a discount of at least 20% to their intrinsic value. Most of these opportunities are found amongst smaller companies, which are under-researched by analysts and ignored by big index-aware funds, Currently the portfolio is 16% invested in FTSE 100 companies, 32% in mid-cap and 43% in smaller companies (including AIM).
Alastair Mundy, who manages the Investec UK Special Situations, follows a contrarian approach, targeting unloved stocks where he believes there will be catalyst for an eventual re-rating. Unlike the Miton fund above, this fund focuses predominantly on large and mid-cap stocks. The fund also has a short position on the S&P 500 Index, a bet that the US market is overvalued and will eventually fall.
Nigel Thomas, manager of the AXA Framlington UK Select Opportunities fund, is a veteran growth investor who has clocked up a formidable track record managing UK equity funds for over 28 years. He looks for companies with above average growth rates led by quality management teams. As the fund has grown in size to £4.5 billion, so too has the exposure to larger companies, but he continues to invest around half of the portfolio outside of the FTSE 100 Index.
Growth… at a reasonable price
“GARP” is a label popularised in the US by former Fidelity star manager Peter Lynch. It caught on in the UK as growth fund managers who were still mindful of valuations wanted to distinguish themselves from all-out growth funds which got hit hard when the technology bubble burst. Today few managers self-label themselves as GARP investors, preferring to describe themselves as pragmatic but one fund that used a systemised approach to filter down the universe of companies to invest in based on both growth and valuation criteria is the Artemis Global Growth fund managed by Peter Saacke.
John Wood, manager of the JO Hambro UK Opportunities fund, has a strong emphasis on protecting capital as well as generating returns. His approach is to identify long term economic trends and then pick out a concentrated portfolio of quality growth businesses that will benefit from them. However absolute valuations are nevertheless very important in his process. Currently the fund is almost 18% in cash reflecting a cautious stance.
Targeted Absolute Return funds
These funds aim to deliver positive returns, across different investment climates by using a wider toolkit of investment strategies that traditional funds. There are a plethora of different strategies that sit under this heading, but examples of funds that incorporate multiple investment strategies under one umbrella are the Invesco Perpetual Global Targeted Returns fund and the gargantuan Standard Life Global Absolute Return Strategies fund, known as “GARS”.
Thematic investing covers both a host of sector specific funds, for example those focused on technology, biotechnology, agriculture, financials and consumer industries, but it also an approach by some managers with wider remits. Among UK fund managers, Newton has been at the forefront of thematic investing, with the firm’s global thematic team identifying key trends that individual managers reflect when compiling their portfolios including the Newton UK Opportunities fund, their UK ‘Best Ideas’ fund.
Jason Hollands is managing director at Tilney Bestinvest