Style neutral: is it the third option?

Something unexpected happened with the world’s fund managers in the 12 months to the end of June last year.

Up to that point, managers with a value focus had been dominating the lists of top performers, both in Australia and internationally, for well over a year.

Their supremacy was more or less unthreatened, ever since the fall from grace of many growth style managers following the bursting of the technology bubble in the early months of 2000.

Before that, growth managers themselves, buoyed at the height of the tech boom by some exuberantly priced stocks, had overwhelmingly led the performance race.

But the performance figures for the year to June 2001 were different. Both value and growth managers were eclipsed by a new breed of manager — style neutral managers.

According to InTech, style neutral managers topped both the Australian and international equity performance tables for the 12 months to the end of June 2001. Challenger International returned 23.2 per cent to win the Australian equites race, while Platinum Asset Management returned 23.6 per cent to top the international league tables.

Ever since, however, value managers have for the most part resumed their position at the top of most performance charts.

The latest InTech performance tables, for the year to the end of January, saw strong value managers Lazard and Tyndall Value top the Australian share tables and value oriented managers Alliance Bernstein and Marathon top the international share results.

Even so, there is a growing body of evidence to suggest the strong performance of style neutral managers to June last year was more than a mere aberration.

The latest review of Australian equities managers by van Eyk Research actually concluded that style neutral managers not only produced more consistent returns than growth or value managers in the three years to the end of September last year, but did so with a lower level of risk.

According to van Eyk, style neutral managers averaged a return of 13.3 per cent and a tracking error of about 2.5 per cent over the three years, while value managers returned 12.7 per cent with a tracking error of 3.9 per cent and growth managers a return of 13 per cent with a tracking error of 3.7 per cent.

The result has been attributed to the unique positioning of style neutral managers.

At their most basic, style neutral managers are part growth manager, part value manager and mostly a combination of the two, allowing them to take a ‘best of both worlds’ position.

The divergence between the performance of growth and value managers has in fact trebled over the last three years, leaving style neutral managers, operating somewhere in the middle, with plenty of room to thrive.

“Growth managers will add value only in a growth market and value managers will only outperform a value market, but style neutral managers can consistently outperform throughout the full business cycle,” Challenger head of equities Pano Raftopoulos says.

But most observers are now arguing that the next growth/value cycle will be a temperate one, with the difference in performance of value and growth managers shrinking back to more normal levels and leaving less room for style neutral managers to outperform both.

“The emergence of style neutral managers is absolutely the product of the disparity in the performance of growth and value managers in the last few years,” van Eyk head of research Rob Prugue says.

“But if I had a choice at the moment between one good style neutral manager or a combination of one good value and one good growth manager, I would choose the combination of the value and growth managers.”

The preference is, of course, premised on the prediction that neither value nor growth, as they have done for the last few years, will outperform each other in a significant way going forward.

If they do, it is not hard to see investors looking even more intently at style neutral alternatives.