Style and Drift: Where Senseless Conventions Damage Returns
Investment “style.” Style “drift.” These are two of the categories and metrics frequently used by institutional investors and their consultants to label and understand their portfolios. Problem is, the whole discussion is kind of senseless because it misses one very important part of the investment equation: making money. I hadn’t thought about this recently until a common sense column by John W. Rogers Jr. in Forbes tickled my memory. Mr. Rogers neatly encapsulates the issue in these snippets:
Many of these people turn to style guidelines, under designer labels
like Russell, Wilshire, Morningstar or others. These systems place each
mutual fund into a category. In my view, too often many well-meaning
financial consultants are overly dependent on such artificial
constructs, to their clients’ detriment. They often ax good funds that
don’t adhere to the tyranny of style boxes. As a result long-term
absolute returns may suffer.********************
When a portfolio manager moves outside the guidelines, though, he is
scolded for “style drift,” as if he had broken some rule of nature. Yet
style drift can occur naturally when a manager sees small- and midcap
stocks outgrow their categories, just as children move up a size in
clothes. What intelligent investor wants to stunt a portfolio’s growth
just to fit it into a category? Further, value often can be found right
next door to a manager’s core category. The important factors in
assessing a possible stock purchase are valuation and a company’s
underlying business fundamentals.The early pioneers who shaped
the mutual fund world—Sir John Templeton, Peter Lynch, John Neff,
William Ruane, Ralph Wanger—searched for value wherever they could
find it. They weren’t investing for their critics.
Amen, John. The consultants have gone off the rails, as far as I’m concerned. In my simple-headed way of thinking, there are just a few buckets that require categories, depending upon whether one is seeking to capture a specific sector/region/capitalization beta or portfolio alpha.
- Index portfolios - for sector/region/capitalization beta
- Index+ portfolios - akin to BGI’s Alpha Tilts strategy, which are principally beta with a small component of model-driven alpha
- Alpha portfolios - everything else, focused on making money wherever it can be made
From a portfolio risk perspective, one will want to manage these exposures in a granular way, far more granular than by the weak and ineffective labels promulgated by consultants. But the buckets themselves are very straight-forward and reflective of the actual goals of the investor. But let’s be clear: there is beta and there is alpha. If you want beta, don’t crap around with mutual funds that are effectively index copiers with some stock picking for window dressing. This is a waste of time and money. Use indexes or, maybe, some cost-effective index+ strategies from a super high-quality provider like BGI (or one of my portfolio companies, Clear Asset Management) to gain broad sector/region/capitalization exposure. For alpha, hire great managers and let them run. Don’t be bound by the artificial style labels foisted upon them. The rock stars of an earlier era didn’t worry about this garbage - they were focused on making money, not gathering assets. They understood that the best vehicle for asset gathering was putting up great returns, and this is what they did. And this is the way it should be today - and forever.
——-
——-
COMMENT:
AUTHOR: Yaser Anwar
EMAIL: yaser@yaseranwar.com
URL: http://www.yaseranwar.com
DATE: 06/01/2007 01:19:12 AM
We can thank the marketing divisions for this. Just another way to move product by categorizing it in it’s own niche.
As long as you can show some BS research, that extends over a span of few years- carefully constructed to meet one’s desired end result, of the use of the certain style, some sucker will buy it.
——-
COMMENT:
AUTHOR: Byrne
EMAIL: sometimesfunnyalwaysright@gmail.com
DATE: 06/01/2007 01:15:05 PM
The only justification I can think of is that some people diversify by style, and they don’t like to rebalance their portfolio because the ‘small cap value’ portion suddenly includes, say, Google.
Dropping someone for ‘style drift’ is bad if you think of them as a manager, but it makes sense when you’re looking at them as part of a balanced portfolio.
——-
————
3 years ago
| view comments
| Wall Street
