Watch out for fund's 'style drift'

Manny Pohl, chief ex­ec­u­tive, ECP As­set Man­age­ment

Money Magazine Australia - - IN BRIEF -

An im­por­tant term for in­vestors to be aware of is “style drift”, where fund man­agers move away from their stated in­vest­ment style or broad in­vest­ment pa­ram­e­ters to find bet­ter short­term returns for their in­vestors.

In­vestors must be clear about their in­vest­ment strat­egy, their mix of man­agers and what they are look­ing for from their man­agers. There will be times when the best money man­agers in the world

– as judged by var­i­ous mar­ket met­rics – un­der­per­form and the temp­ta­tion will be strong for them to take ad­van­tage of short-term mar­ket sen­ti­ment.

For ex­am­ple, a growth-style man­ager, see­ing their growth as­sets un­der pres­sure as fu­ture growth is heav­ily dis­counted by in­vestors, con­sid­ers buy­ing value stocks to im­prove their per­for­mance. While this style drift may cre­ate a short­term ben­e­fit, it usu­ally doesn’t pro­duce the ex­pected out­come and the long-term con­se­quences may be sig­nif­i­cant. Value stocks ap­pear­ing in a growth port­fo­lio would be cause for con­cern.

For in­di­vid­ual in­vestors, keep­ing track of a fund man­ager’s ad­her­ence to their stated style is worth the ef­fort. For in­stance, al­ways read the monthly re­port to un­der­stand why the man­ager has made cer­tain in­vest­ment de­ci­sions and what has con­trib­uted to per­for­mance (or un­der­per­for­mance). An­a­lyt­ics on man­agers that may con­tain “style snail trails” are also use­ful.

If you are in­vested in a fund man­ager and the fund is per­form­ing badly rel­a­tive to the mar­ket, con­sider the un­der­ly­ing rea­sons for that un­der-per­for­mance. If it is a “black swan” or un­ex­pected eco­nomic event – such as the UK’s de­ci­sion to the leave the Euro­pean Union, a coun­try de­fault­ing on its debt re­pay­ments or the election of an un­pop­u­lar pres­i­dent – then prob­a­bly no fur­ther eval­u­a­tion is nec­es­sary. How­ever, if the man­ager is un­der­per­form­ing other man­agers in the same style co­hort, then fur­ther eval­u­a­tion is clearly nec­es­sary.

If the man­ager is in­vest­ing in the way that was promised, how­ever, and is on track for the long-term returns ex­pected, think care­fully about any de­ci­sion to exit es­pe­cially when the mar­kets are volatile.

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