Off the Grid

But there’s more than one approach to thinking outside the grid. “Growth and value are distinct styles,” says Nagaswami, “cap matters, but all-cap offers flexibility.” Global funds afford their managers the freedom to invest domestically or around the world. The approach she suggests includes–in the same portfolio–both global growth and global value–the “freedom to go around the world. All else is sub-optimal.” Citing the Russell Growth Index and the Russell Value Index, Nagaswami says they are “completely non-correlative,” and that both investing disciplines revert to the mean, and that’s why, she says, an equity portfolio should hold both. Find high-alpha generating managers in growth, and value, with a global mandate, (or split domestic and international equity allocations 70%/30% respectively,) and allocate 50% overall to value, and 50% to growth. Be disciplined about rebalancing–volatility skews the balance. Nagaswami’s approach echoes Callahan’s in stepping outside of the style grid, but does that from a totally different angle.

In his 30-plus years in investment management, William Fries says he “mostly didn’t worry about style.” He worries more about volatility and risk; “when things go bad, clients can want to bail,” out, often at the worst possible time. If clients are risk averse, Fries would rather construct a portfolio with lower volatility if that makes clients comfortable. Fries describes the Thornburg methodology as “comprehensive value” based on fundamental research, and investing in three categories of stocks: “Basic value, consistent earners, and emerging franchises.” Fries says basic value stocks are cyclical, with low valuations relative to net assets and earning power; consistent earners are the Blue Chips–non-cyclical with stable revenue streams, and steady growth, but priced below historical norms; emerging franchises are companies that are establishing leading positions in their marketplaces–these are the highest risk companies in the portfolio, so no more than 25% overall is invested in this category and no more than 2% of the portfolio is invested in an individual company in the emerging franchises group. It’s a completely different outlook from Nagaswami’s and Callahan’s, and again outside the box.

S&P’s Edwards says, “most funds don’t manage to the box.” Callahan says it’s the marketing people that use the grid most–they say they can sell a certain type of fund, and that’s what they ask for.