If you always favour growth, you’ll outperform when growth outperforms. But when the style goes out of favour you’ll lose your consistency, according to Hermes Investment Management’s Lewis Grant.
An investment style helps set expectations for risk and performance potential, as well as defining the specific type of market exposure.
However, Grant – deputy manager of the Hermes Global Equity fund – said he baulks at being bracketed in a neat style box.
“We’re not a growth investor, or a quality investor, or a value investor, or a momentum investor—we apply all these methods,” he said. “And we believe that the companies that will outperform over the long term are those with the most attractive blends of these characteristics.”
Over time, he explained, his team will favour different styles at different times in the market as it aims to deliver consistent returns.
The chart below shows how the investment styles of value, growth, quality, and momentum have performed over the last 10 years.
Performance of styles over 10yrs
Source: FE Analytics
Grant’s argued that a style blending all the approaches – exposure to value, growth, quality and momentum – would yield the most consistent returns.
Whatever one might call this method of investing – core, holistic, or style-agnostic – it’s about looking for that blend.
“The ideal company for us is one that ticks all of the boxes,” he said.
What Grant finds self-defeating, he argued, is the potential tunnel vision of a one-style mentality.
“Essentially, you can’t just buy a company because it’s very cheap and ignore the reasons why it’s very cheap,” he said. “You can’t just buy a company for growth at any price. You need to think about the overall, holistic picture of what you’re buying.”
Once you realise the shortcoming of the one-style approach, he said, you have two options.
One is to try to predict what environment you’re in.
“You can actually say, ‘Now is the time for value stocks, so let’s buy a lot of value stocks.’ And a month later, you might say, ‘Now is the time for growth stocks’,” he said.
The Hermes manager cautioned that this approach is likely to cause two problems.
“First, you’re increasing your turnover significantly. You get a lot of trading costs, which can be expensive,” he said. “Secondly, you have to be incredibly good at predicting whether it’s a value market or a growth market. Because if you get it wrong, you’ve just pushed all of your portfolio into the wrong part of the market.” 
The second option, he said, is to be flexible and diversified.
The global equities manager's refusal to fit into one box applies not just to factors, but to regions and sectors as well.
“What we’re doing is making sure we’re diversified. If your portfolio just becomes a big bet on one region, or one factor, such as value, or one sector, you lose that breadth. And then you lose your ability to be consistent,” he explained.
“If your excess return is driven by one factor,” he explained, “then you have to be right in order to outperform. But if it’s driven by say, 150 stocks, then you have that breadth. You only need to be right just over half the time.”
If you can be right more often than you’re wrong, he added, that’s enough to outperform, as long as you diversify.
Investment is actually rather simple, Grant (pictured) went on.
“You find a company which has got fantastic financial statements, a very strong balance sheet, great cash ratio to cover its obligations, a company with a history of delivering growth,” said the Hermes Global Equity manager.
“You look for a company with a competitive advantage over its peers, so it’s got wide margins, maybe they’re getting wider, it’s capturing market share to help it grow into the future. You look for a company with good management, one with a track record of delivering high return on assets, that understand the risks of sustainability and corporate governance.
“You don’t need to favour dividends specifically, but increasing dividend payments would be quite an attractive characteristic. We look for that company that has got improving market sentiments – not exactly momentum, but that turning point where people are just beginning to get excited – and look to see that the company is trading at a discount with peers.”
The problem, Grant conceded, is that no company exists that can do all those things.
“What we’re looking for in theory is that perfect company, but we need to be pragmatic about recognising that all companies have a weakness,” he explained. “The trick is to work out whether that weakness negates all of the company’s strengths.”
Grant said his team actually spends as much time thinking about what’s wrong with an investment as it does what’s right.
“What you don’t buy is just as important as what you do buy when you try to outperform,” said the manager.
Characterising their investment process as “very disciplined,” he described the first step as a “semi-quantitative” process for fundamental analysis. The purpose of the quantitative analysis, he said, is to help his team be objective. “We try not to fall in love with companies,” he added.
While it has an agnostic approach to regions and sector “there are often small biases in the portfolio”, highlighting a slight overweight to Europe due to the valuations.
And while the fund is neutrally weighted in the US, compared with the MSCI World benchmark which has more than half of its constituents US-based, a significant proportion of holdings generate much of their revenues from the world’s largest economy.
“We think there’s still a lot of strength in the US economy, but the valuation of companies that are listed there remain just a little too high,” he said.
Performance of fund vs sector since launch
Source: FE Analytics
The $30m Hermes Global Equity fund was launched in December 2008 and is overseen by lead manager Geir Lode and deputy managers Grant and Louise Dudley.
Since launch, it has returned 299.02 per cent, compared with a 226.15 per cent gain for the IA Global peer group and a 268.34 per cent rise for the MSCI World benchmark. It has an ongoing charge figure of 0.71 per cent.