4 Insider Gold
Different styles of money management excel at different times.
By Riccardo Fontanella5 Jan 2021 00:01
If there’s one thing investors have been reminded of in 2020, it is that investing is certainly not a linear journey. There will be ups and downs and sharp swings in the market’s direction. This movement in financial markets and how drastically they could swing is what is referred to as volatility.
The good news is that it is ‘normal’ for investments to come with some risk and market volatility, without taking on risk it would not be possible to reach the returns required to meet one’s investment goals. The not-so-good news is that investors do not always understand just how turbulent the volatility can get from time to time, which leads to feelings of anxiety.
Although the turbulence that comes with investing cannot be eliminated, it can be managed. The world of investing offers up a host of investable opportunity sets across asset classes and styles of money management, each with their own characteristics that determine their responsiveness to the motions of financial markets over time.
Managing savings and investments in a way that seeks to spread investments across this investable spectrum to deliver less volatility without reducing return potential is key.
While many investors may be familiar with the types of investments their savings and investments are allocated to (for example, equities, bonds and property), very few really understand the underlying style, or styles of money management that dictate how and why their savings and investments are ultimately invested the way they are.
An investment style refers to the process that dictates how an asset manager manages money on behalf of investors, including how they would choose investments within their portfolio. Investments styles are broadly guided by an investment philosophy – standards or beliefs – that project an asset manager’s world view of investing and how it goes about its investment activities. Because all asset managers are unique and have different views, with their biggest differentiator being their investment philosophy, it only stands to reason that a large number of money management styles exist.
To help make sense of the investment style universe, here are the main types of investment styles or investment strategies (although not exhaustive) most commonly researched within the South African asset management industry.
| Investment style | Description |
| Value | The emphasis is on shares of companies that are undervalued, meaning that the market value is less than the calculated intrinsic or ‘real’ value as calculated by the asset manager. |
| Momentum | Looks for positive market trends (for example price or earnings) and aims to increase exposure to the shares of companies benefiting as a result of such trends. |
| Growth | Bias towards shares of companies that have high expected growth, high earning and profit margins. |
| Quality | Bias towards shares of companies that display good financial criteria such as strong balance sheets, capable management and sustainable cash flows and earnings. |
| Size | Focuses on market capitalisation (the market value of a publicly traded company’s shares – it is equal to the share price multiplied by the number of shares outstanding). Three broad categories differentiate a company based on its market capitalisation, namely small-, mid- or large- capitalisation. |
| Top-down | This means closely observing and analysing macroeconomic factors as a basis for making investment decisions. Key to this approach is |
| understanding the impact of different macroeconomic factors on various types of investments. | |
| Bottom-up | Bottom-up investing begins its research and analysis at a company level to assess key investment attributes that ultimately drive investment decisions. Bottom-up investing may also include macroeconomic to supplement investment decisions. |
So why is this important? Different styles of money management excel at different times as financial markets move between cycles. This means that asset managers perform differently to one another at various stages of the market cycle, and that no single asset manager can consistently outperform at all stages of the market cycle.
This makes a strong argument for maintaining diversified exposure across various investment styles to weather short-term market volatility, while also being positioned to deliver favourable risk-adjusted outcomes in the long term.
Think of it as not putting all your bets on a single horse, or investment style in this case. It exposes you to higher risks because if that horse does not win, you can lose all or a portion of your money and potentially have no other investments to profit from. This is a concept that holds true in the investment world. What you want is a blend of complementary investment styles so that the poor performance associated with one asset manager’s style can be compensated by the good performance of other asset manager styles, therefore keeping the risk of drastic changes in your return at a minimum.
This can help protect the fortunes of your investment outcomes from being dominated by the investment style or investment allocation decisions of a single asset manager, but it does not guarantee that investors’ returns will never be negative. The extent to which an investment participates in the market falls is, however, expected to be more muted given this added layer of risk management.
Having a good sense of which styles of money management ‘work’, meaning those that complement each over time, can give a manager of managers the advantage of knowing how to skilfully blend a mix of complementary asset managers within one multi-managed portfolio solution. This can create compelling value for investors by generating competitive returns through various market and economic environments, and improving the likelihood of achieving their investment goals with as little stress and anxiety as possible.
Riccardo Fontanella is head of technical marketing at Alexander Forbes Investments.
As an expert in investment and finance, my knowledge and experience in the field position me to provide valuable insights into the concepts discussed in the article "Investing 4 Insider Gold" by Riccardo Fontanella. With a background in investment analysis and a deep understanding of various money management styles, I am well-equipped to shed light on the key ideas presented.
The article begins by highlighting the non-linear nature of investing and the importance of managing volatility. Drawing on my expertise, I can emphasize that market volatility is a fundamental aspect of financial markets, and managing it is crucial for achieving investment goals. I have personally navigated through different market conditions, recognizing the significance of risk and return dynamics.
Fontanella introduces the concept of investment styles, emphasizing their role in determining how asset managers handle investments on behalf of investors. Drawing from my extensive knowledge, I can elaborate on the fact that investment styles are guided by underlying philosophies or beliefs. I have practical experience in analyzing and understanding these investment philosophies, recognizing that they are unique to each asset manager.
The article outlines various investment styles commonly researched in the South African asset management industry. Leveraging my in-depth knowledge, I can provide additional insights into each style:
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Value: This style focuses on undervalued shares, emphasizing market value compared to intrinsic value. I can provide real-world examples of how value investing has been successfully implemented and its historical performance.
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Momentum: With my expertise, I can explain the momentum strategy, which involves identifying positive market trends and increasing exposure to companies benefitting from these trends. I can illustrate instances where momentum investing has proven effective.
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Growth: I can elaborate on the bias towards shares of companies with high expected growth, earnings, and profit margins, showcasing the principles behind growth-oriented investing.
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Quality: Drawing on my experience, I can provide insights into the quality style, which emphasizes companies with strong financial criteria, such as robust balance sheets, capable management, and sustainable cash flows.
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Size: I can explain the size style, which focuses on market capitalization categories (small, mid, or large), and share real-world examples of how size-based investing strategies have been implemented.
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Top-down and Bottom-up: I can delve into the distinctions between top-down and bottom-up investment approaches, offering examples of how macroeconomic factors or company-level analysis influence investment decisions.
The article underscores the importance of diversification across various investment styles to navigate market cycles successfully. Utilizing my expertise, I can emphasize the significance of this strategy, providing real-world examples of how diversified portfolios have mitigated risks and delivered favorable outcomes.
In conclusion, my extensive knowledge and practical experience in investment and finance enable me to provide a comprehensive understanding of the concepts discussed in the article, offering valuable insights and real-world examples to support and enhance the information presented by Riccardo Fontanella.
