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Does style matter?

Aon questions whether, over the long-term, style bias makes any difference to investment returns.

Tuesday, May 15th 2001, 7:07AM

In the December 2000 Investment Update we commented on how the relative positions of the managers had changed. Those who had been top managers had slipped well down the league tables and vice versa.

Well, the March quarter has seen those new positions confirmed with Tower now in top place over 12 months from second last time and bottom just twelve months ago.

The different styles of management, particularly of overseas equities, has again dictated the return. BNZ's active return of 15.0% (from its 'deep value' appointed manager - Templeton) is in stark contrast with the rest (other than Tower) who are all negative by at least 5%.

There is a difference of over 40% between the best and the worst for the year. Not surprisingly, there is also a very strong correlation between the top discretionary funds and their overseas equity performance over 1, 3 and 5 years.

The fall in the NZ dollar over the 12 months has actually helped lessen the effects of the falls in the overseas markets where portfolios are unhedged.

However, the gap between top and bottom in NZ equities of 29% over the year is also quite remarkable.

You can still hear the value managers saying "we told you so" while the growth managers grit their teeth as they have to face trustees who aren't thrilled at the negative returns that they are soon going to have to disclose to their members.

However, what is perhaps really interesting is the very similar results that the managers have returned over 3 years, irrespective of style.

Analysis of the 3-year returns for the discretionary assets results shows that all managers, bar NZ Funds Management at the top and AMP Henderson Global Investors at the bottom, are grouped in a tight range of ±1.3% of the weighted average return of 8.1%pa.

Even over 5 years, a spread of ±1.4% from the average of 10.8% again covers all but the top and bottom managers.

Does this mean that it isn't really of any benefit to diversify manager risk by appointing managers with different styles - value, growth, growth at a reasonable price (GARP), etc?

Analysis of the year-by-year results reveals that the differences each year have been significant. If only it was obvious when to switch from one style to another.

Asset Allocation
The other feature that drew our eye from the numbers supplied by the managers is the changes in asset allocation.

In particular, we can see that all but three of the managers increased their allocation to overseas equities over the quarter. This is over a period when the index for the sector fell by 4.6% (not nearly as bad as the December quarter though, when it fell 13.7%).

Taking account of how the managers actually performed in the overseas equity sector over the last two quarters, it is apparent that they have felt that the markets have fallen enough to make them more attractive.

At the end of the December quarter, most managers had let the allocation stay where it had been taken by the fall in the sector. The further falls this quarter has seen them taking a view that equity markets were perhaps getting to be cheap and re-allocating further funds to the sector.

The actual re-allocations to overseas equities over the six months from the beginning of October to the end of March, taking into account the falls in the markets as experienced by each manager, are interesting.

The re-allocations range from just 1%-2% in the case of BNZ (who haven't had nearly such a bad time of it) and Guardian Trust Funds Management, through to the 7%-13% by the other managers. Note that some of these are active tactical asset allocation decisions, others are just part of an automatic rebalance back to the benchmark.

The interesting question is whether this reallocation to the sector will have a payoff. It looks as if it might with the MSCI up almost 7% and the Nasdaq up 17% (both in NZ$ terms) since 31 March.

This article comes from Aon's quarterly Investment Update
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BNZ Term PIE - 2 years 4.50    4.60    4.81
BNZ Term PIE - 18 months 4.40    4.40    4.59
BNZ Term PIE - 12 months 4.30    4.18    4.37
BNZ Term PIE - 9 months 4.20    3.97    4.14
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BNZ Term PIE - 90 days 3.50    3.08    3.22
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Kiwibank Term Deposit Fund - 120 days 3.30    3.38    3.53
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