Schroders' David Gasparro outlines themes driving risk and rewards in markets
Style is as important as sector in terms of determining the relevant portfolios for clients, according to David Gasparro, chief investment officer at Schroders.
The group's research points to value and growth styles having a very low correlation with each other, far lower than correlation between countries or within sectors.
'In 2000, the Salomon US Value Index outperformed the equivalent growth index by 26.4%, whereas the broad US market only outperformed the Japanese market by 6.71%,' Gasparro said. Schroders attribution analysis points to country allocation being secondary to sector allocation in terms of driving markets but shows that style carries an equal weight to sector.
Schroders believes while most investors know sectors can drive the market, few are aware style is also a factor.
According to Schroders, style rotates through the economic cycle, making it necessary to treat style with equal importance to sector.
The group believes that value is a cyclical characteristic and relative value stocks tend to perform well after a recession, when interest rates fall, and signal an economic recovery.
Gasparro said: 'There is a big difference between absolute value, or cheap stocks, and relative value, or de-rated ones. In Europe, absolute value is a more distinct characteristic, while in the US, relative value has significantly outperformed abso-lute value. Absolute value is also potentially a defensive characteristic, as it loses less money in a poor equity environment.'
Growth has tended to be a very strong trend outperformer across the US, UK, Europe and Pacific over the past 15 years, according to Schroders.
Gasparro said: 'Cyclically, it underperforms when the economy recovers and during periods of very strong growth. Trend growth is more cyclically defensive and investors should typically increase exposure to this factor when interest rates rise.'
Quality is the purest defensive variable and it is important to increase exposure to this when the economy slows, he said, but it is equally important to reduce exposure during an economic recovery.
Gasparro added: 'As a composite term of price and earnings revisions, momentum does not display any clear cyclical or trend characteristic and has a lot of turnover. It has been strong and globally correlated over the past few years but over longer periods of time it has not been a winning strategy.'
He cited Japan as an example, as over the past 15 years investors would have lost 90% of their money by following a momentum strategy.
Size is an additional factor to consider, he said, but Schroders believes the typical relationship between growth and size, which is to hold large stocks in a recession, has weakened.
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