12/16/2020 Interpreting fund manager style

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Interpreting fund manager style

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By Kaustubh Belapurkar (/posts/author/kaustubh-belapurkar.aspx) | 02-12-20 |

While investing in a fund, investors often overlook the fund’s style. Kaustubh Belapurkar,
Director, Manager Research, Morningstar Investment Advisers India, spoke on the CNBC MF Corner
(https://www.cnbctv18.com/videos/personal-finance/mutual-fund-corner-heres-how-fund-
managers-investing-style-affects-portfolio-7502361.htm) show about how investors should
interpret different investing styles of funds
About the Author and their significance. Here are excerpts (/to
Kaustubh Belapurkar, Director of Manager
from this conversation.
Research, Morningstar Investment Adviser India.
Which kind of investing styles exist in a
mutual fund?
Contact Author (/help/feedback.aspx) | View articles by this
(/h
Author (/posts/author/kaustubh-belapurkar.aspx) Three styles typically exist in any fund –
value, growth and blend. Fund managers
tend to have a bias towards a particular style. They tend to maintain style consistency, regardless
of the market cycle.

There will be periods when one particular style will work while another style might lag behind.
Thus, investors need to build an all-weather portfolio by mixing these unique investment styles to
diversify their portfolios.

How do fund managers filter value stocks?

Value investing style has been around for a long time and has evolved. There are different schools
of thought when it comes to value investing. Essentially, you are buying a stock that is cheaper
than its intrinsic value. The traditional screeners are Price to Equity, Price to Book, Price to Cash
Flow and Price to Sales. Value stocks will typically have a higher dividend yield compared to the
market. Besides these screeners, fund managers analyse a number of factors while filtering a value
stock. A stock might be attractively valued but it should have a good future prospect. A stock might
be facing selling pressure due to some negative news, but its fundamentals may be intact. Value
investors try to hunt for such companies that are currently facing headwinds or are out of favour.
Fund managers use discounted cash flow analysis of the future earnings of the company to
ascertain if the stock is worth buying. These companies are typically undervalued but
fundamentally strong and under-owned.

How do growth fund managers filter stocks?

Growth managers typically focus on the earnings growth capacity of the stocks. The idea is to find
companies which have grown consistently in the past and would continue to do so going forward.
Besides earnings, managers try to look at metrics such as cash flow and sales. The quality of
earnings is good in growth stocks. Fund managers expect growth stocks to record earnings growth
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12/16/2020 Interpreting fund manager style

at a higher than industry average and at a reasonable rate. The ratios such as P/E and P/B will
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typically be higher for such stocks. This is a popular segment of the market so you will see higher
valuation multiples. Growth stocks are very popular which a lot of investors would be able to relate
to.

Why wouldn’t all fund managers invest with a blend style which is a mix of growth and
value?

Every manager has his/her own skill sets for picking stocks. You will see that the quality growth
bias style has done reasonably well over the last couple of years. This strategy didn’t do well in
2015-16. Growth managers stuck to their guns and played out that cycle. Fund managers don’t
chase cycles. Fund managers who have the conviction in their style stay invested in multiple
market cycles and are rewarded in the future. Value and growth are two extremes. A blend
manager will buy into stocks that are not entirely undervalued, nor are they seeing a heady
growth. Suppose there is number one stock in a particular sector, the growth at a reasonable price,
or GARP, manager would underweight that stock because everyone is looking at that stock. The
second stock in that particular sector may be growing at a slower pace than the leader and could
have a reasonable valuation. So a GARP manager would invest in such stocks that are reasonably
priced. Peter Lynch of Fidelity made GARP style popular among the investment community.

How can retail investors recognise the style of a fund?

Investors can ascertain the style through the style box

(https://www.morningstar.in/posts/7770/how-to-make-the-most-of-the-morningstar-style-
box.aspx), which is pioneered by Morningstar. It is a nine-grid box which tells you what style and
capitalisation a fund manager is tilted towards. The vertical side reflects the size or market (/to
capitalisation while the horizontal side shows the style. You can also get a breakdown of how much
percentage of the fund’s portfolio is invested in each of these nine boxes, which is shown below.

(/h

(/wordpress/wp-

content/uploads/2020/12/style2.jpg)

You can also find out if the fund manager has stayed put in a style or has changed his/her style by
looking at the historical portfolio. Do note that if you have a value manager, his/her fund will not be
depicted fully in the value style box. It could be tilted towards blend. Similarly, a growth fund
manager’s portfolio would be slightly tilted towards blend and not so much towards the value box.

What risks value, blend and growth styles exhibit?

If you invest in a value fund, you require patience as this style may go out of favour in some
periods. You have to identify such value opportunities early and stay invested till that thesis plays
out. There are value traps one needs to be aware of. Fund managers don’t buy stocks just because
they are currently priced cheap because there could be something inherently wrong with the
company, which is reflected in the stock price.

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The problem with growth style of investing is that you could enter at a time when the valuations
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high. Growth managers look at forward estimates which may or not play out as per their
assumptions.

The challenge in blend style is finding enough stocks which are expected to grow at a reasonable
rate and available at reasonable valuations. Thus, the investment universe could be narrow in
blend style.

What would be your advice to investors who might be scared by volatility?

A portfolio needs to be looked at holistically. Sectors like healthcare, information technology, FMCG
and power didn’t do well in 2017 while consumer durables, metals and capital goods themes did
well in the same year. The fund managers who had invested in sectors which performed badly in
2017 stuck to their conviction and in 2018 they were rewarded as IT and FMCG bounced back.
Investors often come in when certain funds/theme do well and expect such performance to
continue ahead. It is not that the fund has become bad. One needs to set investors expectations
right.

What proportion investors should ideally hold in each style?

India is largely a growth market. So a large portion can be invested in growth and blend style. One
needs to have a longer-term horizon while investing in value funds as they can be volatile in the
short run.

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SK Sharma Pl. provide PE ratio of each fund on your website in portfolio section of (/h
Dec 3 2020 04:39 AM the fund so that investors can avoid overvalued funds. This will help in
containing the risk.

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