Combining investment styles for more consistent performance

Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments.

Investors are often told to diversify their risk across asset classes, industries, geographies and financial instruments. However, a factor that is seldom mentioned – at least in the retail market – is also diversifying portfolios to include complementary investment styles.

Manager diversification means that an investor is able to combine the strengths of different complementary asset managers into their portfolio. An investor that is only exposed to one particular investment style may have to live with underperformance during periods when that investment style is out of favour.

Of course, provided the investor can stick with this manager, the investor could also ride the wave of good fortunes when the manager’s approach is rewarded. However, investors often find it difficult to stick with a manager whose style happens to be out of favour at that particular time – and constantly switching between managers and funds could often lead to poor performance.

So what kind of approach would help to diversify an investor’s portfolio across not only asset classes, industries, geographies and financial instruments, but also different investment styles and strategies?

A multi-managed approach aims to deliver more consistent performance over time by combining more than one manager, and consequently exposing investors to more than one approach.

Combining managers with different styles helps to reduce the exposure to any one particular view. These different investment styles perform differently during various market cycles.

Importantly, this approach does not aim to pick the top-performing manager, but rather to combine managers with sensible strategies who have an edge in terms of generating outperformance. By allocating an investment to a number of different quality single managers, an investor receives diversification across asset classes as well as asset management strategies and styles. This further minimises the risk of not achieving the investor’s objectives, as it removes the reliance on any single manager to do so on its own.

By its very nature, the multi-managed fund should be more consistent than the manager that follows just one style.

The practice of combining managers with different styles requires a very deep understanding of each manager’s strategy. Multi-managers monitor single asset managers on a continuous basis. They are therefore in a strong position to make favourable asset manager selections and are better placed to exit and enter into single-managed funds at optimal times, or to react proactively to any potential problem or opportunity. In addition, they are able to use their bulk to negotiate institutional pricing and can issue tailor-made mandates as opposed to being limited to single managed funds already on offer.

In an economic environment that remains challenging and uncertain, the importance of a well-diversified portfolio cannot be underestimated. As the market is unlikely to continue delivering the kind of returns we’ve experienced in the past, investors will also be increasingly dependent on generating alpha (returns in excess of the asset class risk taken on) and appropriate asset manager selections are therefore critical.