We spent some time in our most recent article separating investment managers by style, particularly along the value and growth spectrum – relative value, growth at a reasonable price, dividend value, and so on. Value and growth categorizations are useful categorizations for separating different types of investments, but they do not reflect reality perfectly. Like all systems, their goal is to summarize and collate information into a useful way by looking at the broad trends and similarities. Like all systems, they are built on artificial rules, and rules have exceptions. There is a danger to accepting the value vs. growth categorization as inherent truth rather than the shorthand for which they are intended.
So what’s the danger? The danger is that you hire or fire based upon where they fit within this categorization scheme rather than look at the underlying truth of what they actually do. In deference to the investment community, some investment managers will describe themselves within this parlance. For example, you may find multiple investment managers describe themselves as the same type of category (e.g. “traditional value”) but the characteristics of the stocks they target and screening methodology might be vastly different. Another example, you may be attracted to the exceptional returns of Manager XYZ who happens to be in the Small Cap Blend space right as your portfolio needs to fill in a small cap blend manager. But what if that manager tends to hold stocks as they appreciate, moving up in the capitalization spectrum and becoming more “growthy” according to valuation metrics? If you hire a manager which has a tendency to drift between styles, they may get penalized by fiduciary scoring systems even though, in the manager’s eyes, they continue to operate as they always have to generate value. What about times of market stress where prices plummet and earnings become impossible to estimate? This can cause a lot of compression and even an en masse swap of traditional value and growth names; this happened frequently in 2008 and 2009 causing many wholesalers to joke, “growth is the new value.”
Again, the key value of qualitative management analysis is that the process, philosophy, and people involved should be relatively consistent. That value, the consistency, is potentially lost if you are measuring these qualitative attributes with arbitrary quantitative systems – even apparently simple systems like assigning a product to a growth or value stylebox.