Most fund-industry observers like to comment on the management style of various funds. And some believe stock markets go through cycles of rewarding different styles, such as growth or value investing, differently. That may be true. But the issue involves many shades of grey.
Growth and value. Most portfolio managers exhibit at least a little of both ways of thinking in their work. Differences may be obvious only at the extremes.
For example, technology stocks have caught investors’ attention in recent years for their potential to grow earnings—many starting with little or no earnings at all. Take Facebook Inc., for example. In 2012, the company started to trade on the NASDAQ exchange at an initial price offering of $38 a share. Today it trades for $193. That amounts to a compound annual growth rate of about 31 per cent. Back in 2012, the company earned just $0.02 a share. This year, it’s expected to earn $7.69. That gives the stock a price/earnings multiple of 25, suggesting investors are still expecting strong growth from Facebook.
We recently introduced TD Entertainment and Communications Fund to our Top-40 list. The fund gives you an opportunity to participate in some of the most rapidly growing areas of the technology sector. Yet, though it’s made up, in good part, of growth stocks, it also holds shares that are more value oriented. In fact, its prospectus says it uses both growth and value styles.
The ‘style’ challenge
It’s often challenging to make style-based distinctions between funds. We are at the mercy of the portfolio managers to tell us which style they use, since portfolio differences are often far from apparent, as are differences in results.
PH&N Canadian Equity, for instance, is a well-known growth fund, while CI Canadian Investment is a disciplined value fund. Yet both funds hold many of the same stocks. Among their top-10 holdings, both funds hold Royal Bank, TD Bank, Scotiabank, Canadian Natural Resources, Canadian National Railway and Manulife Financial. So you can’t tell a great deal about their investment styles by glancing at their top holdings.
Then too, you can’t tell much about their styles from their performance. Over 10 years, PH&N Canadian Equity’s compound annual growth rate is 3.4 per cent, while that of CI Canadian Investment is 3.9 per cent.
Discipline may be all-important
In our view, a more important factor than style, declared or otherwise, is a manager’s discipline to his or her particular set of decision-making criteria. The best managers use a consistent approach to stock picking, even when nothing seems to work.
In this regard, the manager’s situation is similar to that of the individual fund investor. If you hold a fund that starts to perform poorly relative to its peer group, you will have participated in at least part of the underperformance before you even notice it.
Then, if you move to a fund that looks better, you will have missed part of its superior performance. After all, that’s what will have drawn your attention.
A portfolio manager suffers the same dynamic with regard to stock-picking criteria. To abandon an out-of-favour style may be simple folly. So remaining true to a set of proven criteria becomes the second-most important factor in portfolio management. The first and harder part, of course, is finding that set of criteria.
Few portfolio managers have criteria anyone would call pure growth or value. Indeed, many mangers shy away from these terms, preferring, instead, to describe in detail what they do.
Others muddy the waters by claiming to pursue both styles. Hence, you have growth/value or growth at a reasonable price (GARP) styles.
That’s why we think you should concentrate on manager success and consistency. And on the longer-term record of the fund.
This is an edited version of an article that was originally published for subscribers in the June 15, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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