The financial media spends much of each day trotting out fund manager X, who was up 30% last year or analyst Y, whose five-star picks rose 50%. After a while, you see the same group of people on the screen month after month. Then for some reason, you suddenly never see or hear from them again. Why? Style box investing.

Investing is very easy… except for the fundamental analysis, balance sheet forensics, relative and absolute valuation work, economic cycle analysis, and seasonality knowledge requirements needed to have any probability of being even mildly successful. Since it is nearly impossible to be versed in all these skills, most individual investors (and professionals) outsource portfolio management to other managers, usually in the form of mutual funds or other products.

Most investors accomplish this by trying to find the best funds or managers to build a portfolio. However, with this strategy, investors are faced with an additional obstacle. Most “top-ranked” managers at any given time manage in a certain style – a style likely found in one of the style boxes above. The unfortunate phenomenon is these styles tend to move in and out of favor based on economic conditions, interest rates, inflation, and valuation. To be successful, an investor must also time a manager’s style.

Even world-renowned managers who focus on a specific style endure periods of prolonged underperformance. The most famous Value manager, Warren Buffett, was in the middle of a 5-year period of underperformance when the economic variables I mentioned were not positioned correctly for his Value style. While Mr. Buffett was underperforming, the media airtime shifted toward the best performing Growth managers, with portfolios recently rising to the sky…until the environment turned on them in 2022.

How and why do these styles move in and out of favor, and what does Osborne Partners do to combat this phenomenon?

Although many factors affect the different management styles, the bulk of returns can be explained from a handful of variables including inflation, interest rates, economic growth, the U.S. dollar, and relative valuations.

Here is the general cheat sheet for each of the variable’s effect on management styles:

Obviously, there is a lot to unpack here, but generally increasing inflation is better for Value, rising interest rates are better for Large Cap Value, a strengthening economy is better for Value, and a surging dollar is better for Growth. Relative valuations also play a role, with Value expected to outperform when Growth trades at a significant premium, or Large Caps expected to outperform when Small Caps trade at a substantial premium, and vice versa.

It is easy to see the level of difficulty involved in selecting which styles will outperform since success hinges on an investor’s accuracy forecasting multiple macro variables and valuation.  Additionally, since these variables shift from year to year, the returns of the varying styles shift in and out of favor. Here are the ranked annual returns of these styles since the Global Financial Crisis of 2008.

Source: OPCM

And a 16-year synopsis of each style:

Imagine investing in Small Cap Value after 2012 and 2013 because these managers were all over the media, then watching them rank dead last for five of the next six years? The probability is very high that this will happen to Large Cap Growth managers after strong recent returns. Plus, they were recently obliterated in 2022. Unfortunately, this is the reality for many investors, constantly changing styles to chase performance, only to find themselves persistently underperforming.

A viable alternative is to engage a style-agnostic manager who seeks the most attractive risk-reward opportunities across market capitalizations (Large, Mid, or Small) and investment styles (Growth or Value).

Why Aren’t All Managers Style-Agnostic?

Because it is hard. A style-agnostic approach involves a larger investment universe, more analysis, better sector knowledge, relative valuation expertise, and a strict, time-tested discipline. This can only be achieved with a larger and more experienced investment team of CFA®  Charterholders. At Osborne Partners, we are passionate about our belief that it is impossible to consistently time when different investment styles will be in and out of favor. As such, we have committed to a style-agnostic approach, not because it is easy, but because we believe it is what is best for clients.

As we continually refine our multi-decade old discipline, I think clients are relieved to know that although we can and do underperform here and there, the probability is lower that we underperform by a dramatic amount for a lengthy period. You do not have to time us.

When asked whether we are a Growth or Value manager, we confidently respond, “Yes.”