Fund manager's comment/Raj Shant
It's an easy mistake to make. You are getting dressed to go out, looking extremely stylish. However, you are just a little bit out of touch. Your friends immediately spot your 'stylish attire' as the trappings of a fashion victim.
In 1999 and early 2000, being a growth investor was not so much a matter of style ' a conviction deeply rooted in detailed methodology ' but of fashion, where the primary motivation was that everybody else was doing it. Now things have gone the other way and we have seen a sharp outperformance of a value style, but only a few value investors are style driven. Again, in many cases, it is more a matter of the current fashion and the prevailing winds.
Let me give you an example of how strange this debate of one style over another can be. Take company X. After carrying out lots of analysis and a detailed evaluation of the firm, its industry, its prospects and its share price, the conclusion emerges that the stock is well supported. It should have no more than 5% downside risk, but has the possibility of generating above- average profitability and could generate an upside of as much as 15%.
Now, do you need to know whether this is a growth stock or a value stock? Does it even matter? Taking this example one step further, now imagine that stock X is traded up by 15%, a marvellous return in the current environment, and you are looking at it for the first time now. If the stock falls into a classic growth sector definition and you define yourself as a growth investor, do you still buy it (even though an impartial analysis would show it has limited upside but plenty of downside risk now)?
By the same token, if stock X is a classical value stock, is it still a value stock at this price? And if you define yourself as a value investor, would you just close your eyes and buy it anyway?
While at different stages of the economic and stock market cycles, there will be periods where value stocks or growth stocks outperform, it not clear whether a dogmatic approach to style would add much value. By definition, if there are sustained periods of outperformance by any one style, investors of the other style are asking their clients to accept underperformance for prolonged periods.
While a style approach can be useful for portfolio managers to narrow down the market segment they look at, it is overlooking the critical importance of individual companies and specific business models. In times where there is no clear-cut market leadership, the performance of the portfolio will depend on the merits of the individual companies and stocks, rather than on the skew towards a particular fad or style.
By the same token, when picking a portfolio, try to take a balanced approach to investment; it may not be as fashionable, but it's a lot more stylish.
Raj Shant is manager of the Credit Suisse European Fund
• Style approach can help stockpicking.
• Balanced approach can be best in Europe.
• Performance depends on individual stocks.
• style investing ignores some firms.
• It seems more of a fad definite style.
• Growth or value investors miss out.
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