Fund managers who switch between styles are often hailed as adaptable and unconstrained, but investing in these do-it-all managers comes with its own risks and challenges.
When added to a portfolio, these funds often cause more headaches than they cure, which is why many multi-manager funds and portfolio constructors tend to pick funds that stick to one strategy, rather than the one-size-fits-all approaches.
This is the case for David Lewis, co-manager of the Jupiter Merlin fund-of-funds range. In his portfolios, he is looking for managers with the ability to exploit some type of inefficiency, as he recently told Trustnet, typically those focused on either value or growth.
“We tend not to have lots of managers who try to do a bit of everything,” he said.
Mainly, this is to avoid what Lewis described as “one of the greatest risks in multi-manager investing”: managers shifting around from one style to another, making it impossible to keep track of how your overall portfolio is invested.
Even when these changes are intentional and part of the manager’s process, they can result in an overall portfolio that no longer reflects its original objective. As a result, fund selectors may find themselves holding assets they neither expected nor intended to own.
This unpredictability also makes it harder for fund selectors such as Lewis to forecast how their funds will behave in different market conditions.
“Allowing a manager the ability to flex their approach could mean that they move out of their sphere of competence, possibly destroying capital as a result,” Lewis said.
“This complicates portfolio construction even further, as it becomes unclear how the overall portfolio is positioned from a style point of view.”
Without that clarity, Lewis cannot reliably tilt the portfolio towards value or growth when needed, undermining a key element of long-term asset allocation.
“Being able to move between a growth and a value style of investing is possible, but I would class it as even rarer than finding a manager who has been able to master a single style,” he said.
He was echoed in this view by Glenn Meyer, head of managed funds at RC Brown.
“There are some people who are brilliant at anything and will be the best in whatever they turn their hand to. To do that in a portfolio consistently over time is very hard, so the people that can do that will be few and far between,” he said.
“There will always be somebody whose approach doesn’t lend itself well to market circumstances and even those who change their portfolios with the economic cycle will sometimes lead and sometimes lag.”
Managers who try to flex between styles are looking for opportunities the market hasn’t yet priced in, positioning their portfolios based on where they believe things are headed. The hope is that, over time, those undervalued positions will be recognised by the market and re-rated, delivering a return as new buyers come in. This makes them akin to contrarian investors, said Meyer.
“In this way, you are effectively adding in an element of risk to your portfolio, because your timing may not be right. Your analysis may be absolutely perfect, but what will move the market in the time and frame that you expect is outside of your control.”
This is why Meyer prefers to hold a blend of styles within his portfolios. It gives him the flexibility to adjust exposures as market conditions change, without the need to constantly search for new managers or shift between funds. By tweaking the balance rather than overhauling it, he aims to stay responsive while maintaining stability.
Darius McDermott, managing director at FundCalibre, took a more nuanced view on style flexibility. Citing the philosophy of long-term investing icons Warren Buffett and Charlie Munger, he argued rigid style labels can be limiting – and potentially harmful to performance.
“It’s foolish to pigeonhole yourself into certain categories and to limit your investment universe,” he said. “It might make marketing the fund easier, but it doesn’t help performance. Value and growth are two sides of the same coin.”
For McDermott, being able to adapt to changing market conditions can be a strength, if done well. He pointed to 2022 as a clear example, when a sharp rise in inflation and interest rates made it “quite obvious” in hindsight that rotating out of growth and quality stocks was the right call.
McDermott acknowledges that very few managers can switch styles effectively. Some that can, however, include BlackRock European Dynamic, Liontrust European Dynamic, the GQG Global Equity, Emerging Markets and US Equity strategies, as well as Invesco’s Global Emerging Markets and Raynar UK Smaller Companies funds.
“Fund managers are typically more comfortable with a certain style that matches their philosophy and personality,” he noted. “Style rotation, when done poorly, can risk you chasing your own tail. However, that does not mean it’s a bad idea – it just requires a high degree of skill.”