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From the February 2007 issue of Investment Advisor • Subscribe!
How to Find Style-Consistent Managers
Absent a comprehensive, reliable way to categorize mutual fund managers by style, how can an advisor go about constructing a portfolio of style-consistent fund managers? Here are some suggestions:
- Look for funds with a low correlation relative to a characteristic (i.e., small-cap value) index. Style-consistent managers move about the characteristic grid and generate low index correlations.
- Invest in multi-cap or all-cap funds, which are freer to move along the capitalization dimension, although they may still be restricted along the P/E, P/S, or P/B dimension.
- Seek managers who state they are free to invest in any U.S. stock, an approach sometimes referred to as "free range" investing. Gather as much information as possible to determine if the manager is consistently following a true style.
- Invest in several style-consistent managers who are pursuing complementary styles.
- Manage risk and tilts at the portfolio level and not at the manager level.