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Styles switch as fund values start to blur

MFS International&#39s assertion last week that growth and value stocks are now impossible to define has accentuated the problems facing IFAs when building portfolios.

If falling markets and unrealistic investor expectations were not enough, MFS believes the erosion in the distinction between growth and value means IFAs are at risk if they select a core growth or core value strategy for clients.

Many IFAs admit they are taking a hard look at their investment decisions and are spurning funds with rigid investment styles in favour of those which take a more flexible approach.

Plan Invest joint managing director Mike Owen says: “We do not need to get bogged down in the semantics of growth versus value but I am looking for pragmatic managers who can pick stocks which will grow over the next couple of years. Someone like Tim Russell at HSBC, for instance, who is a stockpicker and chooses both value and growth for his UK growth and income fund.”

Owen believes MFS is wrong to say there is no discernible difference between growth and value stocks – he says technology stocks are most certainly growth, for example – but he agrees that a blended approach works best in poor markets.

Certainly, a number of fund managers with distinct investment styles have toned down their bias in favour of a more neutral or defensive approach. This is particularly true of growth managers, many of whom have reined in their growth bets as the market skew towards value continues.

BestInvest fund analyst Stephen Marriott cites Gartmore European select opportunities manager Roger Guy and former ABN Amro&#39s UK growth manager Nigel Thomas as just two who have restructured funds to reflect the direction of the market over the past six months.

Marriott says: “A lot of fund managers have relaxed their style bias and gone neutral. You have to take it case by case but funds need monitoring to see how the style has changed because managers do stick with the markets. I do not know if the smaller IFAs have the time to do this, so it makes sense for them to take a more blended approach to their portfolio.”

Not only do the changes make the jobs of the less well-funded IFAs more difficult but they also raise the question of whether managers with particular styles – on which basis their funds are often marketed – should dabble in other stocks to beat a falling market.

Investec Asset Management managing director David Aird puts managers through what he calls his Ronseal test – are funds doing what they say on the tin? He the number of managers who have deviated from their remit is alarming.

However, not everyone believes it matters. Simpsons of Brighton IFA partner Andy Merricks says as long as a manager is not chasing the market, he sees no reason why he or she should not look for returns outside their stated style. He says: “I see it as a positive. Really, it is the duty of the manager to do as good a job as possible within the rules. If a client comes to me looking for growth, it does not matter to me how a fund manager goes about getting it. It is a dangerous thing to pin your colours to a particular type of investment.”

Merricks believes investors and IFAs should not be restricting themselves to value or growth but looking to invest with companies that allow managers to be more flexible. Any firms that do not, he says, could find themselves in trouble. The Enron scandal showed that the industry “needs to start thinking the unthinkable”.

His view that there still is a difference is mirrored by most IFAs, who believe MFS&#39s assertion is simply overstating the case. Chartwell investment manager Tim Cockerill believes that not only does there remain a significant distinction but that it is vital to the performance of a portfolio. He says: “The gap is nowhere near as clear as it once was but there is a still a big difference. When portfolios are constructed, you need that differential because contrasting styles make it perform over the long term, with at least two funds hopefully doing well at any given time.”

But it is not only IFAs who doubt the validity of MFS&#39s view. Schroders head of retail investment David Gasparro says the industry&#39s definition of style has become intertwined with other, less relevant considerations: “It is a big issue but it is important not to confuse sector with style. Growth investors look for opportunities for growth but that does not just mean TMT stocks – that would be a ridiculous oversimplification of the investment world.

“They have become meshed together but there are a hell of a lot of things going on in terms of style and it has to be managed carefully.”

MFS does concede that certain managers with distinct styles – Fidelity&#39s Anthony Bolton and Credit Suisse&#39s Bill Mott in particular – remain a good bet for any investor. But with its highly collegiate, stockpicking style of running funds, MFS has a vested interest in saying there is no contrast between growth and value.

The gap is certainly closing but for the time being at least many in the investment industry believe there remains a considerable – and important – distinction.


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