Talking Point  

Star manager exits highlight need for "nuanced approach"

Star manager exits highlight need for "nuanced approach"

The exits in the past year of well-known fund managers Neil Woodford and Mark Barnett highlight the benefits of a more “nuanced approach” to value investing.

Value strategies have now trailed growth investing for a prolonged period of time; a large reason for which is the post-global financial crisis environment of low interest rates and quantitative easing and the rise of big tech.

As a result, investors have been prepared to pay a premium for businesses with very predictable earnings, that is “quality growth stocks”, Jason Hollands, managing director of business development and communications at wealth management firm Tilney, said.

But this does not mean value strategies are permanently redundant.

A different approach?

Mr Hollands added: “The last time I recall people making that prediction was at the height of the dot com bubble. 

"The disparity in relative valuations is now so extreme, that it would not surprise me if we saw a bit of a style rotation at some point. As an investor, you want to have a blend of strategies within a diversified portfolio.

“Just buying unloved stocks on low price / earnings multiples in the hope they will eventually re-rate holds little appeal and can involve a painfully long wait, because many businesses frankly deserve low valuations because they are poor quality or in sectors with low growth potential or declining margins. 

“More discerning managers with a strong valuation discipline also dovetail this quality criteria or are looking for some catalyst for change, such as new management being installed at a business, a restructuring plan or M&A. 

“In assessing value, P/E is only one measure and does not reflect the significant value represented by intangible assets at many modern business. A more nuanced approach is to assess the intrinsic value of a business, rather than just the trading multiple of the stock price compared to forecast earnings.”

Although Mr Woodford and Mr Barnett were value fund managers - their investment styles were arguably slightly different from other value investors.

“But one of their failings was probably they were too focused on value and not focused on the company fundamentals, that is, what was this business is doing to remain relevant at a time that was challenging in addition to that normal economic cycle,” John Moore, investment manager at Brewin Dolphin added.

“So I would remove the 'death of value' from [the story of their downfall]. It is an execution issue.”

Mr Hollands said he was “less interested” in “star managers”, than seeing managers with clear and well-articulated investment processes. 

He added: “I would argue that Mr Woodford’s problems were less about “value” and more about him straying from the approach that had mostly served him well over this career at Invesco.