Heslop, who manages an array of global funds at the group, says that while being either a value or growth investor will allow you to outperform over a certain period, it means you will also underperform if market conditions don’t suit.
The manager says using a single style is very restrictive and that it is not good enough for managers to blame their underperformance on market sentiment. He says taking an all-encompassing approach may mean outperformance will be subdued, but those returns will be consistent and uncorrelated.
“If you don’t blend, yes you will have your time in the sun, but there will be an equal amount of time where you struggle,” Heslop said.
Because of that, he says the majority of fund managers are too restricted.
Some of the best-known value funds include the likes of Alex Wright’s Fidelity UK Smaller Companies and Schroder Recovery. Both have performed well recently as value styles have outperformed in the risk-on environment.
Performance of funds over 1yr
Source: FE Analytics
On the other hand, popular growth funds such as Liontrust UK Smaller Companies, Aberdeen Emerging Markets and Jupiter European have struggled this year.
Heslop says that using a single strategy is very restrictive at the moment as macro drivers still, and will continue to, influence the market. As a result, he says investors need to have an all-encompassing approach and be more diversified.
“Don’t make very concentrated stocks bets, there is no need to be a hero at the moment,” he said.
“I am always looking for reasons to include a stock. Other managers know that they cannot analyse their whole universe of stocks and so will be starting off their stock selection by choosing which stocks they can ignore.”
“Pretend we were GARP (growth at a reasonable price) investors, for instance, we would have to start by excluding every stock that has a price/book ratio of below two or get rid of any stocks that aren’t set to grow their earnings at twice the market rate.”
“By then, you have probably trimmed down from a universe of 3,500 stocks to around just 100 stocks to choose from,” he added.
The manager says that though that style could outperform at certain times, those returns would be highly correlated to other funds in the sector that use the same strategy.
He points to the US market as one of the prime examples.
According to FE Analytics, the average fund in the IMA North America sector has underperformed against the S&P 500 in seven out of the last 10 calendar years and has lower returns over a rolling 10-year period.
Performance of sector vs index over 10yrs
Source: FE Analytics
Heslop says this shows fund managers are restricting themselves by not picking certain stocks.
“Why is it that people don’t buy active managers in the US?”
“Firstly, it is because as a group we have done a great job. However, the other major reason is that the US market is categorised by long periods where value stocks have outperformed and other times when growth stocks have.”
Heslop says investors need to think about diversifying their manager risk and he believes his strategy of blending different styles and types of stocks means his funds can generate independent returns, and therefore alpha, no matter what the market conditions are.
His strategy has seemed to work so far.
Heslop and his co-managers Amadeo Alentorn and Mike Servent run the Old Mutual Global Equity, North American Equity, Japanese Equity and Asia Pacific funds.
Three out of those four funds are top-quartile performers in their sector and have beaten their relevant MSCI index over five years, the exception being the Asia Pacific fund, while all four sit in the top quartile and have beaten their benchmark over three years.
Source: FE Analytics
All four funds boast top-quartile returns over 12 months.
They are also top quartile in their respective sectors for alpha generation, and their information ratio (a risk-adjusted return used to calculate the effectiveness of the manager’s stockpicking) over both three and five years.
Each member of the team has a separate role. Servent is head of systems and concentrates on market data and analyst forecasts, while Alentorn is head of research and focuses on valuations, sentiment and market dynamics. Heslop is head of the desk.
Between them, the managers use traditional stock-selection techniques such as assessing a company’s valuation, balance sheet quality, growth characteristics, analyst sentiment, market trends and growth characteristics.
To make sure they are delivering an independent return relative to their peers, they impose intricate risk-management procedures such as limits on country, sector and company weightings.
“This isn’t a process driven on luck and it doesn’t require us to take massive positions in stocks,” Heslop said.
“We try to deliver an independent return, not because of a certain style. We all know there are the managers who outperform in rising markets and underperform in falling ones and vice versa. We have deliberately designed our strategy to minimise style bias and generate different alpha to our peers,” he added.
All of Heslop’s pure equity funds require a minimum investment of £1,000 and have ongoing charges figures (OCFs) ranging between 1.65 per cent and 1.89 per cent.
