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Styles And Cycles By Steven Mayo
Over three to five year periods is how Institutions, Foundations, Pension Funds and wealthy individuals generally measure the performance of their hired professional money managers. Along with this, long-term money managers are not only measured by their own performance, but also against the performance of their peers, within their mandated investment style. Style is the key word. Styles of investment management include Deep Value, Value, GARP (Growth at a Reasonable Price), and Growth. These disciplines apply around the world. Managers are hired to follow their mandated discipline; however, during market cycles investment decisions may not be rewarded for a year, or longer, and can result in underperformance. For example, to begin 2021, value managers were underperforming versus growth managers. At the end of the year, value had outpaced growth.
One style of stock selection being rewarded more so than others is a normal market outcome. It’s also partly a result of the flow of money being directed to certain stocks more so than others. With ultra-low interest rates, and indices being comprised of more technology stocks, it was only natural for dollars to flow into the growth camp. However, there is always a risk to following the herd and over-loading into one particular investment style. This can result in more volatility. The flow of money and index weightings would be to the detriment of Deep Value and Value stocks in 2020 and the first six months of 2021. By the end of last year value managers had strong performances as companies in the oil, natural gas, lumber, resources, and pipelines roared back with the increase in demand for their products. Market cycles were on full display in this example. I believe that value managers will continue to do well in 2022.
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Value managers will use traditional yardsticks such as cash flow, assets, earnings, and dividends to determine if a stock should be added to their portfolios. Growth managers look more at the potential for growth in sales, and subscribers if applicable, total addressable market, new product cycles, and the forward guidance that companies are projecting. They are not necessarily concerned with earnings, or lack thereof. This is why new/ emerging companies and technology stocks are more volatile. In the end, in addition to having an asset allocation that is suitable, not overweighting any one investment style within your equity allocation is the most prudent strategy to reduce/manage risk. Each style will have its day (or year) through any normal three to five year market cycle. As usual, we end with a quote: “The fact is that strategies that perform sub-optimally under certain market conditions can work surprisingly well in others.” ~ Peter Bernstein Steven Mayo is a Senior Investment Advisor with RBC Dominion Securities Inc. (Member — Canadian Investor Protection Fund). This article is not intended as nor does it constitute investment advice. Readers should consult a qualified professional before taking any action based on information in this article.
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