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(August-2003) Skill, not style, lands the bullseye
Skill will be more important than style when it comes to super funds choosing investment managers in 2003-04.
That is the assessment of industry experts as they review what proved to be another tough financial year in 2002-03 and the likelihood that fund managers will be facing another year of strong headwinds in 2003-04.
Further, they claim the difficult market conditions have meant a convergence in styles with respect to “value” and “growth” and that if the challenging environment of the past 24 months has shown nothing else, it has proved that skill probably counts more than style when confronted by an adverse market.
So with the tail winds generated by the buoyant equities markets of the late 1990s now only a dim memory, super trustees are being advised to look for skill and quality when selecting their investment managers.
And with respect to style, the immediate sentiment is towards a cautious approach based on “neutral” or “diversified” settings.
According to Russell chief investment officer Peter Gunning, the outlook with respect to style remains clouded, albeit that there are some early signs of movement in the US.
“What we’ve seen is a lot of PE (price to earnings) compression and, because of that, style with convergence with respect to value and growth,” he says. “A lot of the traditional growth stocks are fallen angels, moving them onto the radar screens of value managers.”
Gunning notes that while some changes were emerging in the US, Mercer would not be in the business of trying to “style time” or “style rotate”. Rather, it was looking at a more conservative approach based on style diversification.
Gunning is among those who believe that skill will mean as much as style in the current environment.
“It comes down to skill and in this sort of environment, investment managers need to demonstrate their skills,” he says.
This is in contrast to the recent, more buoyant times when the momentum generated by market conditions meant fewer skilled managers were seen to be succeeding.
“We went through a period of considerable tail wind where even the less skilled managers did OK. Now we’re facing a headwind and we think picking the right manager will be crucial,” Gunning says.
Frontier Investment’s Fiona Trafford-Walker has a similar view on the skill necessary to emerge well when dealing with the current “headwind”.
“Where managers are concerned, the current environment has helped determine who has skill and who has simply benefited from the tail wind,” she says.
Trafford-Walker has even suggested that the current market conditions may generate a rationalisation, offsetting some of the growth in the number of management companies resulting from the more robust market conditions.
“The current market conditions mean it has become a good deal harder and in better times, there was something of an explosion in managers,” she says. “ I believe we’ll now see some rationalisation of the industry in circumstances where trustees are asking and seeking to determine where managers can add value.
“It will no longer be a matter of trustees simply looking for names, but rather whether managers can add value,” Trafford-Walker says. “When you haven’t got a tail wind, you’re under greater scrutiny and people are looking for added value.”
Dennis Sams, head of research at Towers Perrin, agrees that the direction with respect to style is hard to pick, especially in circumstances where “the gap between value and growth has not been so pronounced”.
He also cautions that Australia is less style-driven than, say, the US.
According to Sams, much will depend on the pace of economic recovery and the ability of managers to adjust to the changing circumstances which will flow from such a recovery.
He cautions, however, that in cyclical terms, value tends to run longer than growth.
AUTHOR
External
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