Vista - Why we blend funds...

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01/05/2019
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The Fund Research Team spend their time seeking out the funds which they think will perform well within portfolios. This isn't a case of simply looking for the best performing ones, indeed I'd argue that's a flawed approach - why? Because the performance of a fund will change alongside market conditions, some will be suited to one type of market rather than another. A fund which is performing well today may not perform as well in six months' time, should the focus of investors have altered. So, there are two things we as a team try and do; firstly, to understand when a given fund is likely to do well and secondly, to decide whether we want to hold it in portfolios even if we don't expect it to perform well in the near term.

We refer to this as blending funds - or not putting all your eggs in one basket! In broad terms, equity funds fall into two groups based on their style of investing. By style, we mean how they approach their stock selection, what they look for in a company and what aspects of their analysis are prominent. These two groups are value and growth. There are no hard and fast rules around these descriptions, consequently a multitude of variations exist, however most funds can be put into one of these groups. 

Growth or value style?

When we look at funds which we describe as having a growth style and compare them with those having a value style, we are, in simple terms, looking at opposites. The manager of a growth fund is investing in companies which are growing quickly and ploughing back profits to generate more growth. The value manager, on the other hand, is looking for companies where the estimated value of a company is more than the current share price. 

All things being equal the manager is expecting the difference between how the market values the company and its actual value to change - hopefully the market will bid the company share price up. Often this type of company is paying out its profits as dividends and not, like the growth company reinvesting. 

The above description is by necessity quite basic and many other factors come into play, one being quality. Quality is subjective, but invariably refers to the management team running the company, the nature and type of business, how well established it is, and whether there are barriers to entry and therefore pricing power. 

We can't always predict the future

When constructing portfolios, we'll blend value and growth funds with the expectation that over time the performance of the two funds will vary, and the one performing best at any given time will not be the same. Why do it this way? It's because the market is hard to second guess, and although we spend a lot of time trying to do just that, we are realistic and know that predicting the future is difficult. So, by having a foot in each 'camp' when the market changes its focus and stocks that were in favour last quarter are out of favour this quarter, we have a fund that takes up the running. 

 

The value of an investment with Rowan Dartington may fall as well as rise. You may get back less than the amount invested.