Style drift is 'biggest risk an investor can take'


Managers who move from one style to another are taking the "biggest risk an investor can take", according to the co-manager of the Nomura Global High Conviction fund.

Appearing on the FTAdviser Podcast, Ilan Chaitowitz said it was important fund managers understood clearly what assets they were owning.

He was discussing with chartered financial planner Minesh Patel the success of the growth style of investing - which has outperformed in recent years - and whether the value style was due to make a comeback.

Mr Chaitowitz said: "A general point is to really know what one owns and to have an insight into that domain of knowledge. Where any investor steps outside of their comfort zone, however big or small that zone is, we think that is the biggest risk an investor can take."

He added: "When you are taking a view on growth versus value you are actually taking a big bet on an asset class - long term bonds for example - which one doesn't have an expertise in. We choose not to take that risk, we are very much bottom up stock-pickers.

"We find that is the best way for ourselves to generate good returns because we are playing in an area we know and understand better than the broader market."

Mr Patel, a financial adviser at EA Financial Solutions, said style drift - and the number of growth stocks he owned - was a "contributor" to the problems Neil Woodford had faced.

The Woodford Equity Income fund was suspended earlier this year because the large number of illiquid, unlisted investments in the fund made it hard for investors to get their money back, and earlier this month it was announced the fund would close.

Mr Patel said: "I think that [style drift] was a contributor but I think that he was taking too many risk positions for the mandate. Woodford Equity Income fund is designed to be a mainstream fund [...] his decision making was questionable.

"Having looked at his history, even when he managed the Invesco fund he used fairly alternative stocks and strategies which at that point didn't unwind, but this time around those positions did unwind."

In recent months value stocks have started to outperform growth, with the MSCI World Value index returning 0.69 per cent over the past three months while the MSCI World returned 0.66 per cent, with the MSCI World Growth index underperforming.

But Mr Chaitowitz said the success of growth was connected to longer-term trends which were not going away.

He said: "There is a 90 per cent correlation between the trajectory of the two-year versus the 10-year Treasury yield against the performance of value versus growth in the US that is very compelling.

"Now what has driven that itself is a much broader topic and it goes to technological disruption, demographic changes and the growth of China. These sorts of drivers are secular, they are very long-term in duration and we do not see those abating any time soon, so while there may be near term reversal trades or near term optimism about the economic cycle over the next 12 to 18 months I think that the medium term trend is lower for longer."