Is Management Style Really Important?
If you like to read about investing in mutual funds, you will often hear the term management style. What does this term mean? The management style is really the discipline that the manager employs to manage the fund. Different managers have different styles but the mutual fund industry tries really hard to categorize these disciplines. Today, there are so many different management styles like Value, Growth, Momentum, Blend, GARP, Relative Value, Top Down, Bottom up, etc.
Frankly, all this talk about management style confuses me and I’m supposed to be the expert. The problem is simple – there are no universally agreed definitions as to what each of these categories mean. And now our industry has created a term called ‘style drift’.
Growth versus Value
The two most common disciplines when it comes to management style are growth and value.
Traditionally value mangers were fund managers that placed emphasis on buying stocks cheap. Value investing is like looking for bargains and is one of the oldest ways to pick stocks. In the 1930s, Benjamin Graham and David Dodd, finance professors at Columbia University, laid out the framework for value investing. The concept is similar to shopping for the product that is most reasonably priced for its quality.
In contrast, the growth style is more focused on growth instead of price. In fact, they may be willing to pay more of a stock as long as they have expectations that the stock will grow.
I have been fortunate to sit down and chat with a number of fund managers in the world and the reality is that every manager, regardless of the categorization of their discipline is looking for stocks that are cheap and they grow.
As the mutual fund industry grew and became more competitive fund mangers and fund companies started to create new fund styles to differentiate them from the competition.
Given the proliferation of mutual funds and the ‘new’ management styles, the term ‘style drift’ has been popularized. An example of style drift is when a value manager will put in growth stocks to bump up performance when value is out of vogue. To the manager it may be his discipline and to his competitors, it is called style drift.
The end justifies the means
Right or wrong, we have become a results oriented society. Regardless of the methodology, what most investors’ want is the best performance for the least amount of the risk on a consistent basis.
The problem is that neither value nor growth will deliver results all the time simply because everything goes in cycles. Often when value is going up, growth is going down.
My two cents
So, really, does all this talk about value, growth and management style really matter? I may be totally off base but I don’t think so. I used to care more but now, I think pegging a manager, as a certain type of style is not important. I think there are very few managers who are truly disciplined to be one or the other. As a result, these new hybrids and style classifications have emerged. Understanding the different types of styles is only half the battle. The problem is that it is very difficult to know how a fund or manager is truly classified. In my ongoing quest to understand all of these classifications, I have found there is very little consistency in how managers and funds are classified by their management style.
Knowing which style will be in favour in the future is a futile strategy because you cannot time the markets. Rather, it is important to take the time to understand the style or discipline of a particular fund or manger. Worry less about how it is classified, as there is too much inconsistency. Worry more about understanding the buy and sell strategy of good managers. The best managers can tell you exactly what their investment disciplines are and why they work. If you do not have the time, expertise, resources to do this yourself, then get the help of a financial advisor who can help you attain this information.
For the purpose of the FundFilter, we used to breakdown our picks into management styles but now we do not really care about the styles but focus more on the end result. For our perspective, we analyze the history of the fund to try to find managers that provide performance with as little risk as possible, regardless of what style use.