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Friday, June 1, 2007
The worry with ‘Style drift’

Are investors getting what they’re paying for from their investment fund managers? After four years of equity gains, the question highlights a key concern among professionals with the task of scrutinising fund manager adherence to their mandates – the job descriptions governing their investment approach.
Stanlib Multi-Manager notes that ‘style drift’ continues to be an issue in a market where equity gains have been topping 25% a year. A multi-manager tries to blend various styles and skill-sets from a range of individual fund managers to balance risks and create a product with specific appeal to certain types of investor.
Such clients buy into a well-defined product proposition; but uncontrolled ‘style drift’ can affect the character of the investment, ultimately creating a mismatch between what the investor thought he was buying and what he is really getting.
As Florbela Yates, Investment Marketing Manager at Stanlib Multi-Manager, notes, “Style drift is not new, but the challenge tends to be accentuated when significant gains have been achieved over several years by a particular asset class and investment approach.
“A constantly rising tide lifts every boat in the estuary. In investment industry terms this means individual fund management companies are challenged to differentiate their performance and demonstrate that their skills add special value.
“At the moment the manager who is supposed to be taking a defensive stance is under particular pressure as more aggressive models may be racing ahead. Managers are not immune to peer pressure. And they may make adjustments to close the performance gap, perhaps compromising the mandate in the process.”
The tendency to follow gradually what is currently favoured by the market has existed for decades, locally and internationally. These days, however, the multi-management approach to retail and institutional investment puts a ‘policeman’ on the block to help keep the drift in check.
“We don’t like to be known as ‘the style police’, but we sometimes take on this role,” she says.
Currently, the markets favour equities and the ‘growth’ investment style. Such style concerns a bias toward companies that have not reached full maturity and operate in dynamic sectors. In contrast, a ‘value’ approach is biased toward investment in larger, well-established companies that may no longer be fashionable and whose shares may trade at a discount to the firm’s underlying value.
Yates explains, “In such a scenario, managers may gradually increase equity weightings, blurring the distinction between conservative, moderate and aggressive equity structures.
“Simultaneously, a value manager may gradually trespass into growth territory.”
It can be argued that investors ‘benefit’ from style drift as it ensures they at least obtain some of the gains created by current conditions. The shocks come when the cycle changes and the market suddenly favours another style.
“This puts the spotlight on the role of the multi-manager. It’s our job to blend styles and balance risks in line with the risk tolerance and overall objectives of our clients.
“The right blend cushions the shock of a change in the markets. The right blend is a function of maintaining style discipline and adherence to the mandate. This is extremely difficult to achieve for individual investors, but is core competence for the multi-manager. That’s what we’re here for.”

Copyright © Insurance Times and Investments® Vol:20.5 1st June, 2007
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