Returns are predominantly factor-based and portfolio stability can be found by employing multiple investment styles all at once, according to Jupiter’s Ian Heslop.
Factor investing and identifying different investment styles to generate returns can be far more flexible than staunch growth or value portfolios.
Heslop, manages the £634m Jupiter Merian Global Equity fund, which invests in a diversified portfolio of global equities, with more than 400 holdings – an unusually high number for active funds.
Rather than relying on individual stocks, the managers tilt the portfolio towards different areas of the market, making sure it is not reliant on a single investing style.
Heslop said: “I would never be as aggressive to say it’s all about factor investing and there’s no room for stock selection,” but added that an certain amount of return is now factor-based.
He added that even a trusted value manager, with a good history of stock selection, will have endured a difficult 10 years owing to the strong-growth environment, while a quality-growth manager will have “been a hero.”
“That’s not taking away from anyone’s ability to pick stocks – that’s just a truism that factor returns have been very strong in one direction.”
This pro-growth environment has been the symptom of loose central bank policy and intervention in asset prices.
The market has changed this year as the world recovers from the global Covid pandemic, with value stocks leading the way for the first time in years.
Fahad Hassan, chief investment officer at Albemarle Street Partners agreed with Heslop that any success, however, would be down to this factor change, rather than a manager’s stock-picking.
He said: “Value will outperform now, but it’s not down to the manager, it’s just the factor that’s helping them - no one’s cleverer than anyone else.”
Given the fickle nature of these factors, Heslop argued that a cautious and blended approach was necessary to stop style concentration dominating the returns of the portfolio.
“These things are cyclical and nothing works all the time,” he added. “Factor returns are unstable and necessarily need to be diversified in a portfolio.
“The fact that nothing works all the time, that’s when you get in trouble by trying to beat benchmarks.”
This is true of the US market, where active managers have repeatedly come under fire for failing to beat the benchmark, an issue of being highly style-concentrated.
Heslop said you can derive an element of stability by having all of the styles present at once.
However, this requires an element of timing, something which is informed by investor behaviour and how they react to certain events.
“Divorce yourself from the idea that the market is behaving one way because interest rates or the oil price is doing something.”
He said whether the market is persistently moving in one direction, or where the cross-section of volatility is at can be more useful indicators.
Performance of index over 2yrs
Source: FE Analytics
As the chart shows, the CBOE SPX Volatility VIX – Wall Street’s so-called ‘fear gauge’, which measures 30-day expected volatility of the US stock market – has slowly started coming down to levels last seen in February 2020.
Jupiter pays particular attention to how investors are allocating their own capital and in particular, the types of stocks that are moving markets.
He said that two stocks could be very similar, yet one has slightly more debt and the other is slightly cheaper, but the one in which investors are allocating capital to is telling.
Factor investing and the idea of style-drift go hand-in-hand.
Style-drift, or moving into areas away from the process of the fund can be tempting when a certain style is in favour. Value managers especially, have had to watch quality-growth take the spoils over the past decade.
Heslop explained that this isn’t an issue if a manager can trust their conviction even when the style is against them, but rather, when they lose conviction in their process.
This, he said, was especially true in the dot.com bubble of the late 1990s where managers “bent valuation metrics to make stocks look cheap.”
Heslop added that investors should be concerned about this today, and whether arbitrary metrics are being applied to justify selection
“If a manager is looking at these companies in a different way than the rest of the market, then that’s a problem. You have to be careful how you justify.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over five years, Jupiter Merian Global Equity fund has made a total return of 87.7% compared to 85.8% for its MSCI World index and 81.5% for the average fund in the IA Global sector.
It has an ongoing charges figure (OCF) of 1%.
Rayner Spencer Mills Research analysts said that while the longer-term performance is good, the fund can struggle in an environment of risk-on and risk-off phases.
They said: “It is better suited to trending markets although it can adapt to a rotational market where new phases are reasonably long running.”