Investment Manager Styles

The significant difference in performance between value and growth fund managers which occurred in almost all markets over the past decade raises the question, which investment management style is best?

The two main investment styles are Value and Growth. There is another investment style called GARP (growth at reasonable price). This is really a mix, being lower priced growth stocks that still represent value.

Value managers believe that stocks which are under priced relative to current performance will outperform over the long term.  This is based on its current price relative to one or more of a number of valuation measures. These can include historic or near term earnings, cash flow generation, or tangible asset valuations. 

Growth managers believe that growth in earnings drives stock returns. They therefore seek to identify stocks that should have  the ability to deliver such growth over time. 

In practice, distinctions between manager styles are often blurred.  What were value shares can become growth shares. Similarly a growth share that goes out of favour and the share price falls, may well be purchased by a value manager, as it now represents better value for money.

The tendency for many managers to keep relatively close to a benchmark index, for example the MSCI World Share Index, can also blur the distinction between growth and value. The index is a mix of growth and value shares. Movement in the index, could be driven by one sector of the index for example technology performing well. In the late 1990’s it was technology shares, and more recently commodity shares. What were growth shares have now become value shares, and vice versa.

How active a fund manager is, is very important, irrespective of whether they are a value or a growth manager. Good active managers regardless of their being categorised as growth or value, seek to add value for their clients.

As investors, consistency of investment style is important. For a fund to change from value to growth for a reason such as a change of ownership, is no different to trying to time the market. There are times when one investment style will perform better than the other. The difficulty is that no one really knows when that will happen. The turnaround can be quite quick, which is a reason to use a blend of management styles within an asset class, such as international shares. 

Rather than being concerned by what investment style is the best, investors may be better served by using the best managers within the various investment styles. This combined with using a blend of management styles is likely to ensure above average investment returns.