“The main reason we would not change our stripes or, say, switch over to growth, is because the part of the market we work in – small and micro-cap stocks – is very illiquid,” says Hench.
“The fact is you get your liquidity when you don’t think you really need it, in the bad markets like today. There is plenty of inventory available, and that’s when you are really making your money – when stock prices are going down and you are buying them at very depressed levels.”
Nick Sketch, senior investment director at Investec Wealth & Investment, picks out another value-focused Legg Mason stalwart, Bill Miller, as another dogmatic individual, having beaten the S&P 500 index for 12 years solid before encountering tougher times post 2008.
“It has been argued that value investing works over a rolling five or 10 years, and that the excess return comes from investors being compensated for the pain of what actually happens to performance when the wind is in one’s face,” he says.
“On this basis, avoiding style drift should usually be a virtue, as long as the fund manager has communicated properly and trusts his/her investors to stick with him/her over an investment cycle.”
The best policy
Honesty with investors is something all fund managers should prioritise, particularly if an investment philosophy that once delivered the goods is no longer rewarding in the same way. After all, being dogmatic for the sake of it is not going to win you many assets – or friends.
With this in mind, Sketch points to the recent example of hedge fund manager BlueCrest Capital Management, which announced it will be giving investors back all of their capital starting this month. Despite some negative publicity around poor performance and outflows, he believes manager Mike Platt and his team deserve some praise.
He says: “They looked dispassionately at their business, which has been outstandingly successful, and concluded that the new investment environment meant their approach could not deliver good returns to investors or to the owners of the fund manager (ie themselves). They have not sold the business or tried to reinvent the wheel.”
Like it or loathe it, fund manager departures are common, and groups will more often than not promote from within to ensure a continuation in process and philosophy to appease nervous investors. However, this is not always the case.
For so long associated with Mark Mobius’ strong value bias, the change at the helm of Templeton Emerging Markets Investment Trust with the appointment of Carlos Hardenberg was one of the most notable personnel moves of 2015.
Straight away there was some suspicion from fund selectors and analysts. Morningstar moved the fund to a Neutral rating and warned of a process change, with the trust now run on a “more diversified and risk-conscious basis than previously, with a restructuring of the relationship between analyst and portfolio managers”.
In its research note, Winterflood said that despite this “new broom” approach there would be substantial pressure on the new management team to outperform over the next few years. Hardenberg himself has already started instigating the changes, having said he expected his number of holdings would increase to between 80 and 120, compared with the 55 stocks held when he took over last October.
“We are expecting the stock list to get a bit longer and for a more measured approach to be taken on where to spend the risk budget, but many would be unhappy if, having taken the pain over the past three years the portfolio changed tack completely, and started looking like an index tracker or a growth-biased manager’s portfolio,” says Sketch.
“The portfolio clearly needed to change and that is happening, but we wouldn’t want to see a complete U-turn.