Style-neutral funds for market rotations

Simplistic as it might seem, investment style considerations explain plenty of the shifts in investor portfolios from the past year or so. Cyclical shares have had a resurgence, led by some big moves in energy and financials, while quality growth portfolios have been through some big peaks and troughs. Quality growth shares have run into trouble this year in particular, bar a very recent recovery.

In such circumstances it’s hard to argue against the case for diversification by style, sector and geography. When it comes to the first of these, investors can pair the few remaining value funds with more growth-oriented names (see Funds to hold alongside Fundsmith Equity and Scottish Mortgage IC, 29.10.21) in the hope that the two balance each other out. This, however, might seem like a complicated and expensive way to achieve such balance.

Another option is to back a fund with more of a generalist, style-neutral approach to offset market rotations. These are rare beasts, but a handful of names stand out.

Picking a lane

Active fund managers have had good reason to lean heavily into a particular style in recent years. Greater scrutiny of so called closet trackers – funds which charge a level of fees typical of active funds, but which deviate only marginally from a benchmark – is likely to have forced managers to display more conviction. The conditions of the past decade have also led many funds to bet heavily on growth stocks, while the few remaining value funds have in many cases built a reputation by sticking to their guns.

Even some investment teams that make a point of diversifying can fall into a certain camp. Take Monks Investment Trust (MNKS). Although this Baillie Gifford-run fund dips into more cyclical areas thanks to a focus on different investment categories, its managers have still been pretty growth-minded in recent history. Some 52 per cent of its portfolio was in “rapid growth” plays such as Sea (US:SE), Tesla (US:TSLA) and Baillie Gifford's Schiehallion Fund (MNTN) at the end of October, and “growth stalwarts” such as Alphabet (US:GOOGL) and Microsoft (US:MSFT) made up 26.7 per cent of its assets. Cyclical growth plays represented 15.5 per cent of the portfolio, while “latent growth” holdings including Ryanair (IE:RYA) made up 5.8 per cent.

et a few “neutral” portfolios remain. Global options include MI Metropolis Valuefund (GB00B3LDLX86) which despite the name mixes both growth and value characteristics, says Rob Morgan, chief analyst at Charles Stanley. Its latest annual report points to something of a mix in late 2021. The fund had a 30.1 per cent allocation to technology shares including Alphabet, Oracle (US:ORCL) and Cisco Systems (US:CSCO) at the end of September, but some classic value sectors also get a look in. Take the fund’s 21.7 per cent weighting to financials, for example. It is very concentrated, with between 15 and 25 holdings, and has a high level of active share (the extend to which it differs from its benchmark). Morgan notes that while it has lagged the market in recent years, the under performance seems relatively modest when its balanced approach is taken into consideration. 

John Monaghan, research director at Square Mile Investment Consulting and Research, highlights Artemis Global Select (GB00B568S201).

"The managers are focused on uncovering quality businesses that are supported by established growth trends, and the resulting portfolio is less exposed to the vagaries of the prevailing economic climate," he says. "The process is dynamic, with new themes continually being explored, tested and occasionally included in the portfolio while those considered to have played out are reduced or removed. Broadly speaking we would expect this fund to lag in aggressively rising markets, particularly when the market is being led higher by pro-cyclical industries or when it appears to have over extended itself. However, the strategy should hold up better than the index and peers during market sell-offs."

The UK and other regions

Investors haven’t been hard pushed to find examples of style divergence in the UK, with growth funds like Liontrust Special Situations (GB00BG0J2688) and CFP SDL UK Buffettology (GB00BF0LDZ31) on the other side of the fence to a variety of value stalwarts. But some managers still seek a middle ground.

Mick Gilligan highlights Edinburgh Investment Trust (EDIN), a UK equity income fund run by James de Uphaugh and Chris Field at Majedie Asset Management, a firm recently bought by Liontrust. And Monaghan likes the recently renamed LF Liontrust UK Equity Fund (GB00B88NK732) run by the same team.

Edinburgh Investment Trust's literature states that its management team avoids style biases and instead seeks different opportunities across the market. As Gilligan notes, the team likes companies that have scope for share price recovery due to a change of management, organisational transformation or improving business environment. “Approximately three quarters of the managers’ effort is in depth stock research, while the remainder is in macroeconomic and geopolitical analysis,” he says.

Morgan, meanwhile, says: “In the UK the obvious one that springs to mind is Richard Buxton’s Jupiter UK Alpha (GB00BFYN3R70), which isn’t a particularly style-driven fund [and blends] elements of growth, value and special situations. The pragmatic nature means allocation to these broad buckets does change a bit over time, though.”

Other markets

We have deliberately focused on fund sectors to which you might have bigger allocations, but there are sector neutral funds focused on other markets. To note a few, Morgan points to quant-driven Jupiter Merian North American Equity Fund (GB00B1XG9G04) as a play on the US, adding that quant-led portfolios are generally more likely to straddle different styles. He also highlights “pragmatic” funds that can move in and out of other areas such as Artemis US Extended Alpha (GB00BMMV5G59) and Premier Miton US Opportunities (GB00B8278F56), a fund we have previously highlighted as looking down the market cap spectrum and away from the mega-cap tech stocks (Looking beyond the FAANGs IC, 25.09.20). Turning to emerging markets, Morgan highlights Templeton Emerging Markets Investment Trust (TEM), noting: “Having been firmly value in the past, it now sits in the middle as a core proposition”.

Over the longer term you might view passive funds as one route to a balanced portfolio as they offer such broad market exposure and slowly rebalance to reflect companies' changing fortunes. But this comes with some heavy caveats given how lopsided they have become. For example, the S&P 500 and MSCI World indices are heavily exposed to the US tech majors, emerging market and Asian indices are highly exposed to China, and the FTSE 100 has some big cyclical exposures.