|
 |
 |
A matter of style
Everyone knows it’s important to diversify. By spreading your money around you reduce the risk of losing large sums should one investment score a duck. Most people diversify by choosing different types of investments: shares, property, fixed interest. At Russell, we also diversify within each investment type, by manager style. (Actually, we add a further layer of diversification too, but that’s another story.) What is manager 'style' ? Share investment managers, like bowlers, adopt different styles. Just as there are three bowling styles (fast, spin and medium-pace), there are three investment styles (growth, value, and market-oriented). A share manager’s chosen style determines the types of stocks it buys and the way it constructs a portfolio. Growth managers buy companies with above average prospects for future earnings increases. These companies typically trade at higher prices, relative to earnings, due to higher expected earnings growth. Growth managers will pay the higher price, provided the company’s prospects are strong. Value managers buy companies representing good value because they’ve been overlooked by other investors so their share price is lower than it should be (relative to the company’s financial prospects). Value managers prefer companies paying sustainable dividends, as income returns continue even if the price falls. Market-oriented managers use economic and market themes to choose companies representative of the broader market that should perform above the average. Some have a temporary bias towards growth or value styles, but generally no consistent bias. Some simply replicate a certain market index. What should investors do? Would the Australian test selectors pick four Shane Warnes or four Glenn McGraths? Never. The risk of match conditions not being as they expect is too high. Great bowlers though Warne and McGrath are, the selectors want more balance in the bowling attack. This is a multi-style strategy. Blending styles reduces risk and helps produce a more consistent team performance. When it comes to share investments, wise investors do the same and blend all style types to reduce risk. Russell knows that sharemarkets can bowl bouncers. Offbreaks, legbreaks and an occasional flipper occur too. Our strategies are based on dealing with the inherent uncertainty of the next ball. Our disciplined investment process means we can perform well in all market conditions. What makes investment management harder than selecting a cricket team is that we can’t ring the curator for advance notice of pitch conditions. When it comes to investing it’s even more important than in cricket to pick a balanced team capable of winning, whatever the conditions. Which style is best? In cricket there are many uncertainties: weather, pitch conditions, calibre of the opposition. A good team needs a mix of bowlers to cover all possibilities. It’s the same for investing. Market conditions can play a significant role in determining which style performs better at a given time. Broadly speaking, growth managers do better in rising markets and good economic conditions when company profits are increasing. Value managers do better in falling or volatile markets, when the reliable dividend-paying shares they hold are in demand. Market-oriented managers are like the ‘medium-pacer’ aiming to generate average returns in all conditions. The performance of value and growth styles, in particular, can be quite different. Over longer periods, value managers have performed better than growth managers, but in some years growth style managers have performed significantly better. These fluctuations in return mean that investors who choose one style of manager alone risk receiving returns that are significantly different from the market. Diversifying across styles reduces volatility without causing a significant reduction in returns (see table).
Source: Macquarie Group Learn more about Russell Investment Approach
|
 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
 |
|
|
Terms
of Use. Privacy
Policy.
Achieve is issued by Russell Investment Management Limited (RIM), ABN 53 068 338 974, AFSL 247185. In preparing this information we haven’t taken into account your own personal circumstances, including what you want and need for your financial future. It is important for you to consider these matters and also to obtain and read the relevant PDS before you decide whether to acquire or to continue to hold a product. Go to www.yoursupersolution.com.au to download a PDS. Interests in Russell SuperSolution are issued by Total Risk Management Pty Ltd.
|
|
The art of building a successful multi-manager share fund is like selecting a Test bowling line-up. The right mix of styles is crucial…