During the crisis in emerging markets, equity fund managers that have invested in Asia, Latin America and eastern Europe are most concerned with their exposures to specific countries. How much do they have in Russia, how much in Indonesia? According to a report by ING Barings, however, those portfolios managers may be asking the wrong questions. They should be analyzing how much they have in value stocks, how much in growth.
Getting the right mix of investment styles is a major influence on portfolio performance. "It turns out that a deterioration in credit quality appears to be strongly associated with the relative outperformance of emerging-market growth companies on both a current and prospective basis," writes ING analyst Simon Hookway.
Funds that bet on value stocks in Asia, during what seemed to be a market rebound in April, did well at first, as Asian markets bounced 50% led by value stocks. Since then, such stocks have underperformed.
Style investing is well established in the US, where two main styles are value, in which investors look for stocks that are underperforming but that have an asset or franchise value; and growth, where the emphasis is on companies with the potential for earnings growth. Outside the US, however, investors aren't familiar with the criteria used to distinguish growth from value stocks.
Help may be at hand. London-based, Style Investment Research Associates, or Sira, was set up two years ago by Robert Schwob, a former chief investment officer at Citibank.
Schwob has developed, along with David Golya, previously a lecturer in statistics and computer science at Sheffield University, an analysis service and software system to enable investors to interpret international equity market performance in 17 markets and to analyze portfolio strategy and stock selection, by style. In the US, the key factors are price-to-book ratios and dividend yields. In Europe, Schwob says, investors "have to be more sensitive to other factors, such as different reporting and accounting procedures, not to mention local practices and market structures, in detecting what constitutes growth or value."
Schwob has broken style down into 14 factors: five are based on value (book price, dividend yield, cashflow yield, sales to price, earnings yield) four on growth (return on equity, earnings growth, income to sales, and sales growth), two size/risk measures, a risk momentum measure, debt-to-equity ratios and foreign sales.
Last October, Schwob and Golya began writing their portfolio style analysis software, now working with investment consultants William M Mercer. Andrew Dyson, head of UK pension funds at William M Mercer, explains his firm's interest: "We saw it as a superior product in style analysis, and in the UK for example, style analysis is underexplained. This system is easy to use, has global applications, and caters for different factors influencing different markets."
Schwob has already signed up several fund managers, including British Airways Pensions, Global Asset Management and Citibank Global Asset Management.
"It's one of several tools we use to monitor our portfolios," says Matthew Bowyer, global equity portfolio manager at Citibank. "What distinguishes this is its straightforward identification of style factors with financial statement information. It's useful in allowing us to ensure that our investment strategy is consistently implemented in our portfolios." Antony Currie