Substance over style?

Why an agnostic approach beats equity style biases.


Investors would be better served seeking opportunities from across the equity market than anchoring themselves to ideological style biases, argues David Cumming.

For active investors, it is important that their philosophy and processes are seen as effective and sustainable by clients. As the future is clearly not equal to the past, there is plenty of evidence that active equity investors can outperform if they have the correct processes.1 The key is that they can effectively direct their resources to assessing what is changing and judging future outcomes better and more profitably than the obviously non-dynamic passive investors or backward-looking exchange-traded funds.

Investment-style biases are often used by managers to reinforce consultants’ or clients’ belief in their ability to achieve superior returns and differentiate themselves from other managers. Styles such as value, growth, quality or momentum tend to feature as process variations.

However, there are a number of problems with style biases. Most obviously, they restrict the pool of stocks you can own, and consequently your investment opportunities. In a world where a lot of investors are driven by macro rather than stock specifics, this can lead to style-biased investors fishing in a pool where growth stocks are overvalued while value stocks are cheap, or vice-versa due to an excessive focus on macro drivers such as currency movements or bond yields. Their philosophical constraints prevent them from investing elsewhere.

Style biases also leave portfolio managers at greater risk of smart beta challenge or tighter portfolio management hurdles. This is particularly the case where the approach is formulaic enough to be algorithmically expressed via a smart beta strategy, replacing a quality value strategy, or where their performance can be measured against benchmarks reflecting their factor biases.

Instead, we favour a style-agnostic approach. As active, stock-driven and future-focused equity investors, the best way to deliver for clients is not to constrain your investment opportunity set, nor your ability to respond to changing trends or information flows, both at the micro or macro level. This is especially relevant when competing against non-dynamic alternatives.

Style drift

A style-agnostic approach allows portfolios to simply follow the best fundamental stock opportunities, whatever the ‘style’ implications. This gives us the widest opportunity set to choose from and to have style ‘drift’ within portfolio construction. It also avoids the risk that macro factors may impinge on style performance at different points in the investment cycle.

Furthermore, being style agnostic leads to less factor or thematic volatility due to the sector biases inherent in various investment styles. Growth, for example, is often associated with being overweight technology. It should also diminish the risk of ‘anchoring’ – in other words, favouring one particular stock or sector. Changing portfolio exposures to a changing environment are allowed to be more dynamic under a style-agnostic philosophy.

Style-agnostic, idiosyncratic stock selection cannot be expressed by smart beta, ETFs or passive strategies, and its performance hurdle cannot be tightly constrained. Also, style-agnostic portfolios will remain relevant throughout the cycle, with less client churn as the investment cycle progresses and style ‘boxes’ fall in and out of favour.

Intellectual shortcut

In conclusion, there are a lot of factors that have to be in place to encourage clients away from the passive option. Committed, well-resourced investment teams, a common investment approach, clear communication structures, efficient portfolio construction and the scale to directly access company management are all advantages. Having a style bias is not.

Style bias is simply an intellectual shortcut that restricts opportunities

Style bias is simply an intellectual shortcut that restricts the opportunities created by market inefficiencies; a way of limiting your universe (and your workload).

However, if you have the analytical resources and organisational agility to cover the investment universe, you don’t need shortcuts and can focus on first principles. Look for situations where company fundamentals are mispriced, and when these fundamentals transpire you make money. This flexibility offers a clearer and more efficient delivery of the truth that the future is not equal to the past, which is the nemesis of passive investing and ‘smart’ beta. Style biases simply get in the way.


1 KJM Cremers & A Petajisto ‘How active is your fund manager?’, The Review of Financial Studies, 2009 (probably the most cited study in this area)


Important information

This document is for professional clients and advisers only. Not to be viewed by or used with retail clients.

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). As at 19 June 2018. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In the UK & Europe this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27- 13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd (AIPPL) does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.


Related views