The Growth style of investment management focuses on companies whose forecast sales and earnings growth are likely to be better than those projected for the market, with strong balance sheets and a manageable levels of debt. In implementing a Growth strategy fund managers focus on companies with a proven track record, assuming the company will continue its success. However the market also recognises the superior quality of these stocks and Growth investors often pay a premium.
The Value style of fund management focuses less on earnings and more on company price, buying stocks believed to be undervalued. Statistical measures and qualified judgement are employed by Value fund managers to identify bargain stocks, with the view that a company’s true value will eventually be recognised resulting in share price growth. The Value approach means company shares can be bought relatively cheaply. Risks include ability to identify a genuinely undervalued stock and timing, not buying to early or late.
Style Neutral or growth at a reasonable price (GARP) fund managers do not follow a particular style but aim to exploit the differences between market price and investment value within their stockholdings. Style Neutral fund managers seeks stocks with strong expected future earnings growth yet avoid stocks they believe to be “fully priced” or “overvalued”. The difficulty here relies on the stock-picking skills of individual portfolio managers rather than a clearly defined process that an entire management team is following.
Hedge funds are a different type of managed fund. They can undertake a wider range of investment and trading activities, across a diverse range of assets such as stocks, bonds and currencies and employ a wide variety of investment strategies and techniques. They are generally not sold to the public or retail investors and are typically open to high net worth individuals and institutions, such as superannuation funds. As a result they are much less regulated.
Global macro fund management is again a different style of investment. Macro-style managers invest in opportunities based on macroeconomic factors, typically across regions and across the major asset classes. Interest rates and inflation levels, monetary policy, geopolitical changes and government policies are some, but not all, of the factors that can influence investment decision. The Global macro style funds are also subject to fewer restrictions.
Asset allocation is an investment strategy that enables funds to diversify their portfolio across a range of asset classes, in varying weights depending on risk appetite. This diversification helps balance risk and reward. The four major asset classes with the Australian managed funds industry are cash, fixed income (bonds), equities (shares) and property. However commodities, infrastructure, insurance products, derivatives, foreign currency and collectibles (art, coins, etc.) are also alternative investment assets.
Cash assets, such as short-term bank deposits, bills or treasury notes, are highly liquid. They are safer investments designed for a short-term period, yet also carry the lowest level of return and can be affected by inflation. Typically cash offers little potential for capital growth. Fixed interest, such as government and corporate bonds, is a more volatile asset than cash, however, it is less volatile than growth assets. Fixed interest carries a low to medium risk, depending on the counterparty, and predominantly rewards investors through a regular income stream, which is usually higher than cash investment earnings. Cash and fixed interest are classed as ‘defensive’ asset classes, designed to defend an investment fund from losses. They are popular with short-term or risk averse investors looking for more secure investments with some consistency in returns.
Property assets include both direct property (actual ownership) and listed Real Estate Investment Trust (REIT) investments across residential and commercial sectors. REIT prices move in accordance with underlying property fundamentals and broader share market volatility. Shares typically fluctuate with movements in a company’s profitability and general economic and industry conditions. As a result shares bear more risk of capital loss than cash or fixed interest. Company growth means profits can be reinvested or distributed to investors via dividends. In Australia and New Zealand, there are also tax benefits for investors through the franking credits carried by dividends. International shares also have the additional risk of exchange rate changes, though the benefits include diversification and access to emerging markets and industries not well represented in Australia. Property and shares are regarded as ‘growth’ assets. They are higher risk and more volatile assets, designed for long-term or aggressive investors willing to ride out market volatility for potentially higher returns.
An investor’s risk tolerance, ultimate goal and investment time frame all influence a fund’s asset allocation. There are various asset allocation strategies based on these factors. Strategic Asset Allocation produces an asset mix that offers optimal balance between expected risk and return over a long-term investment period. Tactical Asset Allocation sees investors take an active approach and attempt to position a portfolio into those assets, sectors, or individual stocks that show the greatest potential for gains. Core-Satellite Asset Allocation, a hybrid of both the strategic and tactical strategies, and Systematic Asset Allocation are further strategies.