What to do when your investment style goes out of fashion

18th July 2017 by Darius McDermott

Juliet Schooling Latter, research director, Chelsea Financial Services considers the issue of investment style.

Flicking through Vogue magazine the other day, I was astonished to come across a page dedicated to fuchsia ensembles (for the colour-challenged, think extremely bright pink). I recall donning something in that shade only once in my life, in a moment of teenage madness, before I quickly came to my senses and disposed of all photographic evidence forever. I can only hope the resurgent colour trend proves equally short-lived.

Styles, however, don’t just come and go in the world of fashion. When it comes to investing, there are often long periods when one style will outperform, and being out-of-fashion with your finances can have just as dire consequences as your wardrobe!

Investors need look no further than the last couple of years for an example of how style can influence returns. First up though, it’s worth clarifying what we mean when we talk about ‘style’: we mostly use the term to refer to a preference for investing in either ‘growth’ or ‘value’ shares.

Growth shares are typically companies whose earnings are growing quickly and who are reinvesting for lots of future growth. Their potential future cash flows are considered especially valuable in a low interest rate environment, which means growth style investing has outperformed value in recent years.

Value shares, on the other hand, can be described in a nutshell as ‘companies with potential that are cheap’. They often struggle in times of low economic growth and a low growth outlook, as investors may underestimate their ability to bounce back. Conditions haven’t been ideal for value style investing for some time. The somewhat unexpected burst of optimism on the global growth front following Trump’s election last year, coupled with a second interest rate rise from the US Federal Reserve, sparked a brief value rally. Then, as Trump’s verbose promises of infrastructure investment and corporate tax cuts failed to materialise in 2017, growth style again reasserted itself.

Perhaps I secretly like to see the world through fuchsia-coloured glasses, but I love to back an underdog. Value investing allows you to do just that and for investors that have the patience to wait for unloved companies to turnaround, it has historically proved rewarding. The risk with this style, however, is that sometimes cheap things get even cheaper and if you are picking your own stocks you could come undone pretty easily.

Instead, I suggest accessing these types of stocks through high quality funds investing in this style with proven track records. While hanging on to your 90s frocks may not be advisable, value funds are definitely ones to buy and hold for the long haul – regardless of the fashions.

Here are three such funds run by three experienced managers, which may underperform over certain periods due to their strong stylistic nature, but which I believe warrant a place in your portfolio for their long-term return potential:

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.

1 FE Analytics, Jupiter UK Special Situations v FTSE All Share, TR in GBP, 10/07/2007–10/07/2017

2 FE Analytics, Investec Cautious Managed v IA Mixed Investment 20-6-% Shares, TR in GBP, 10/07/2007–10/07/2017

3 FE Analytics, Schroder Asian Income v MSCI AC Pacific ex Japan, TR in GBP, 10/07/2007–10/07/2017