Investment style in single-manager, multi-manager and multi-asset funds

Patrick Norwood, Insight Analyst (Funds)

Investment style is probably best known in the context of equity-only funds, where you have Growth and Value. Funds with a Growth style will invest in companies that are expected to have growing earnings over the next few years (e.g. they might have some competitive advantage) and whose share price is expected to increase as a result. Funds with a Value style, meanwhile, invest in companies whose current share price is below its fair, or intrinsic, value as measured by the fund manager but is expected to increase back to this fair value in the near future due to some potential ‘catalyst’ identified by the manager. 

Of course many equity funds are style neutral, as a consequence of the manager’s process, or they might rotate between styles depending on the point in the market cycle. Whether the fund is Growth or Value or some blend, however, a key point here is that its style and whether the manager sticks to this style is in many ways at least as important as the performance of the fund. 

This is particularly true in the multi-manager context, where the multi-manager will often select underlying funds with different styles for diversification purposes. Growth and Value funds should perform well at different points in the market cycle and therefore have negative, or at least low, correlations with each other. Thus putting together a Growth and a Value manager in a portfolio should be expected to result in lower volatility for the combined portfolio than either of the two individual Growth and Value funds. 

If, however, one of the underlying funds drifts away from its stated style in order to achieve greater returns (e.g. a Value manager moving away from their style when Growth is in the ascendancy) then its correlation with the other fund(s) in the portfolio will increase and the above diversification benefit will be reduced. 

Also, in terms of the new MiFID II directive coming into force, firms will be required to provide greater disclosure and transparency in terms of their products while intermediaries will be expected to know in detail the product they are selecting for their client, so as to improve investor protection. 

In a multi-asset context, the different styles can be seen as Risk Targeted and Return Focused. In the case of Risk Targeted, the manager’s main aim is to keep the fund within agreed risk (normally standard deviation) parameters, which they will do primarily by altering the asset allocation of the fund (e.g. reducing the amount risky assets such as overseas equities and increasing the percentage of less risky asset classes like government bonds if the risk level of the portfolio is reaching its upper limit) but possibly also through changing the mix of underlying funds (moving to less ‘punchy’ funds in the case of the previous example). 

Although Risk Targeted funds will want their returns to be as high as possible, this will be secondary to remaining within their stated risk bands. As with the above, the manager keeping to their style is more important than the fund’s performance - although they might be tempted to invest in riskier assets to achieve greater returns, the mandate is to keep risk below a particular level and the client investing in that fund has probably done so as they can only tolerate a certain amount of risk 

Return Focused funds, meanwhile, as their name suggests, will target a stated level of return, often expressed as a percentage above cash, inflation or an index over a number of years or a market cycle. The funds aiming for higher returns will invest in riskier assets and vice versa. In this case it’s the risk of the fund that is secondary - although these funds will usually have some risk control, achieving the return will be the primary aim. 

In summary, it’s important that (1) the adviser or client knows the investment style of any fund they are investing in and (2) the fund manager sticks to their style.