Multi-managers insist it is vital to combine different stock-picking philosophies in their portfolios, to safeguard investors.
Citywire AAA-rated David Lewis, fund manager on the Jupiter Merlin range, believes you need exposure to both value strategies and quality growth. ‘Blending is integral: we want our portfolios to perform in all market conditions,’ he said.
He defines value managers as contrarians finding opportunities that are not being rewarded and growth managers as those buying stocks with strong potential and fundamentals.
‘We tilt portfolios towards where we think economies or the business cycle is going. But a huge style bias can leave you exposed if something unforeseen happens,’ he said.
Lewis said blending investment styles had become more important in the wake of quantitative easing. ‘This has short-circuited the business cycle and made it exceptionally difficult for managers trying to call the markets and macro environment,’ he said.
This approach is applied across various sectors. ‘Within global equities we’ve got exposure to [Citywire AAA-rated] Terry Smith [Fundsmith Equity] at the quality growth end and Stuart Rhodes’ M&G Global Dividend fund, which is value focused,’ he said.
Range of factors
Nathan Sweeney, senior investment manager at Architas and co-manager of various multi-manager funds, considers more than just value and growth. ‘There is also quality, high dividend and minimum volatility, and then sizes of companies’ he said.
He said blending styles was now easier due to tools such as Style Research that enable managers to analyse underlying holdings. ‘You’ve also had the introduction of new financial products, such as exchange-traded funds (ETFs), that allow you to follow specific investment styles,’ he added.
Blending is determined at asset allocation meetings. Portfolio construction meetings are also held to examine factors such as earnings drivers, the effect of currency fluctuations and valuations. These can all help dictate style shifts.
Sweeney believes financials is an example of a sector in which the tide may be turning. ‘There’s a lot of focus on deregulation and [US president Donald] Trump is looking for a Fed that is pro-growth, pro-stock market and anti-rate rises,’ he said. ‘This will be good for financials.’
The benchmarks followed by fund managers are also important, as they can lead to biases towards specific sectors. ‘A better understanding of the manager and how they are positioned gives us an edge in allocating to factors and sectors,’ added Sweeney.
The right balance
The Janus Henderson Multi-Manager portfolios are currently equally balanced in terms of style, according to Nick Watson, a fund manager on the team. So they are invested in both the Invesco Perpetual European Equity Income fund and the BlackRock Continental European Income fund.
These funds are managed by experienced teams with similar objectives. But they differ in their views of the economic environment and portfolio construction.
‘Stephanie Butcher at Invesco has a more constructive outlook. She is finding attractively valued opportunities in more cyclical industries like financials,’ said Watson.
Citywire + rated duo Alice Gaskell and Andreas Zoellinger at BlackRock are more cautious. ‘They have a more defensive growth stance through overweight allocations to consumer goods and healthcare.’
Watson said both have outperformed. ‘Their positive relative performance is very complementary and enables our clients to experience a more stable journey towards competitive performance,’ he said.
Blending styles has also worked well for Japan, with the country experiencing sharp style rotations in recent years. Watson said an extended period of outperformance from one strategy presents an opportunity to take some profits and add to the other.
‘Man GLG Japan Core Alpha has a strong large cap value flavour, whereas First State Japan is more exposed to fast growing mid cap companies,’ he said.
‘The diverse nature of our holdings enabled us to be active in rotating between them.’