Manager selection, growth vs value investment styles

Funds Management

by Clive Tompkins

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MLC Portfolio Manager Myooran Mahalingam talks with MLC Head of Risk, Simon Elimelakh about the two broad investment sytles and how selecting managers from both styles ensures a smoother outcome for investors.

Myooran Mahalingam: Hi, my name is Myooran Mahalingam, Portfolio Manager Global Equities and it’s my very great pleasure to be chatting with Simon Elimelakh, Head of Investment Portfolio Analytics. Welcome Simon.

Simon Elimelakh: Thank you.

Myooran Mahalingam: You’ve been looking and analysing managers for a few decades. What drives manager performance?

Simon Elimelakh: There are many ways to answer this question. The way we see it, we are using very quantitatively driven rigorous tools. And when you look through these tools, this lens, you can roughly put managers in two categories - fall in two different investment styles. Both really well known, one is value and one is growth. And we believe that’s it’s one of the main driving forces behind their performance, what style they follow.

Myooran Mahalingam: Can you give any observations for comment on the current market environment?

Simon Elimelakh: This is a good question, because we believe that the environment is perhaps in transition. What I mean by that, if you look at the performance of our active managers and just in general, active managers across the universe. What you can observe is that over the last four years or so, it’s been really volatile. To be specific, if you go back to 2015, managers who follow a growth style did really good, really well and value managers really suffered.

Next, the following year 2016, it was opposite. Value did really well and growth was under. And then the following year and probably six months of the current year, growth managers were doing better again. So you can see how there was this all style driven. What we observe now, with this higher volatility and high uncertainty in the markets, is that perhaps we’re entering a new period, where there is not any predominant style wind, if you want, blowing one way or another.

Myooran Mahalingam: In that context, why do you think it makes sense to combine individual managers, into a multimanager construct?

Simon Elimelakh: That’s a very interesting question and there is no single answer. So I’ll give you a few bullet points, if you want. First of all, when you simplistically look at managers as falling in these two categories, growth and value, both of them make sense. What I mean by that is over longer periods of time, they both deliver positive return, or what we call alpha, relative to the benchmark. But both of them experience significant and sometimes prolonged periods of underperformance.

So my first answer would be, by combining managers of different styles, we provide our clients with a much smoother run. We protect them against the significant downfalls associated with single managers. So this is the first answer.

The second answer is that when we combine managers, when we select managers of different styles, what they deliver to us and what we look for, is not just style driven performance, but also something extra. What we can call stock specific alpha. And again, when you combine managers together, you provide you preserve, this stock specific alpha to your clients.

Myooran Mahalingam: Simon Elimelakh, thank you very much indeed.

Simon Elimelakh: Thank you, it was my pleasure.