Value investors hindered by ‘style drift’ and blurred lines

Value investors hindered by ‘style drift’ and blurred lines

Investors looking to participate in the market rotation that began last year may face a difficult time doing so given the risk of “style drift” and blurred lines between value and growth strategies.

After several years of underperformance, the FTSE Value UK index gained 41 per cent in 2016, compared with just 14 per cent for the FTSE Growth UK index. A similar trend was seen in global indices.

However, FE Analytics data shows several UK value and recovery funds lagged both peers and the value index in 2016, having outperformed in years when their style was out of favour.

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Fund selectors have now cautioned investors seeking value exposure to take a more discerning approach.

“People will want to protect their assets under management and [there will have been] style drift in the case of value managers who moved up the quality scale,” said Duncan Blyth, an investment analyst at Tcam.

“We have to look beneath that [value label] and see whether the manager has stuck to their style.”

One reason for the discrepancy may be that several recovery funds classify themselves differently, despite their portfolios’ names. 

The managers of the Rathbone Recovery and MFM Slater Recovery funds – which have both outperformed peers in recent years – do not consider themselves to be traditional value investors.

“There is certainly no style drift,” manager Mark Slater said.

As a result, fund selectors have warned that caution is required when considering funds that use a 'value' label.

BMO Global Asset Management’s Gary Potter said: “It’s very hard to assess [value or growth] in a way that’s clear.”

Andrew Gilbert, an investment manager at Parmenion, added: “The lines between value and growth are very difficult to make out. You can invest in what you think are value managers and still underperform. There are many definitions of value: there is light and deep value.”

Other factors may also be responsible for the differing returns. For example, 2016 saw a material divergence in sector performance within the value space itself.

Last year the FTSE All-Share Oil and Gas index gained 60 per cent following a stabilisation in the oil price, while the FTSE All-Share Banks index rose by a comparatively low 14 per cent, data from FE Analytics shows.

Some believe that value-oriented managers, including those that have lagged, could benefit from their more cautious approach if the rotation continues into 2017.

“Within indices there will be a lot of pretty poor companies that have a very short-term bounce,” Mr Blyth said.

“There are some poor businesses that bottom-up stockpickers don’t pick. Those companies may fall back, but the more resilient businesses should continue to perform.”