Smart BetaAug 25 2017

Fund selector: A dedicated follower of fashion

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Fund selector: A dedicated follower of fashion

Style. As they say, you’ve either got it or you haven’t. Fashion, on the other hand, is completely different.

According to Business of Fashion, the current must-have item is anything by Gucci. For a mere £175, anyone can be the coolest thing in town with a pair of Gucci New Ace Web Sneakers. Fashion, or trend, is available to all – but to carry it off, you have to have style.

There are two types of fashion in the investment world. First, there is the trend. The recognition of what is going up and what is not. It is what we all call momentum. 

Now there is nothing wrong with this as an investment style. ‘The trend is your friend’ is a well-respected adage. The knack is to know when Gucci becomes ‘so-yesterday-darling’ and that everyone has instead switched to Prada.

Which brings us to the second incarnation of fashion, and the problematic one. It is the one most investors are prone to, the post-event catch-up. By the time everyone knows that something is in vogue, almost inevitably the party is winding down. The extreme examples include commercial property in 2005 and dotcoms in 1998-99. 

More recently, think US smaller companies and Donald Trump: a new president, new hopes and lower taxes. What then is the best way to play this? US smaller companies, obviously. 

Yet, had you joined the Russell 2000 party a month later on December 9, your return (at the time of writing) would be 2.8 per cent. Had you bought the S&P 500 index instead, you could have banked 9.6 per cent. That is a lot of underperformance in the name of trendiness.

Now style, that is something else. It is an emotive word, one that may conjure an image of Sean Connery’s Bond, or the Duchess of Cambridge. In the investment world, it is much more utilitarian – it is just a characteristic. 

Funds have characteristics: sometimes intentional, sometimes not. The two most frequently referred to by the cognoscenti are growth and value. The two appear to be very different: one seeks growing sales – and hopefully profits – and is less worried by valuation. The other seeks to identify stocks that are cheap, and is less worried by shorter-term trading prospects.

There are a good number of funds that conform to these stereotypes. Indeed, it has become rather fashionable to try to work out which over-simplified pigeonhole is currently in fashion. Investors frequently ask themselves, ‘should I buy growth or value?’