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We look at style creep, management movement, performance and more
Thursday 05 Jul 2018 Author: Laura Suter


‘Style creep’ is a well-known term in the fund management industry, which is when a fund manager starts to deviate from their investment style.

There might be a number of reasons for this action, from the current investment market going against their style, a rise in fund assets, or pressure from their bosses to boost performance.

For example, a manager that invests to a ‘value’ style, which involves buying discounted companies on the basis they are unfairly cheap and will rise in value, may find that this strategy is out of favour in the market.

It may be tempting for them to start investing in different companies, outside of this core style.

Another example is where a fund manager who invests in smaller companies starts putting money in larger companies, or fails to sell the small companies once they have grown into large firms.

This style creep can be dangerous for a number of reasons. First, you picked that fund manager, and that fund, to sit in your portfolio and diversify your risk. You don’t want them to start operating like another fund you hold, or investing in the same companies. Second, the fund manager will be moving away from their specialism, and so may not be as good as picking companies in this new sphere.

The main way to spot style creep is to fully understand the investment style of each fund manager you allocate money, and the type of companies they should invest in. You can then regularly check the fund factsheet to ensure they are sticking to their stated process. Any dramatic change in companies, the number of holdings or the style should be a warning flag.


Like in any profession, fund managers can change jobs. A fund manager switching from one asset management company to another doesn’t necessarily mean you should immediately sell – but you shouldn’t automatically move with them either.

Research company Morningstar, which rates funds based on a five different factors, includes the parent company as one of these. In particular, it looks at the size of the company, its priorities, its ownership structure and the culture of the firm.

If a fund manager is moving to run a fund to a very similar style, with a similar level of support underneath them, and the parent company is similar, then it may make sense to move your money.


When deciding whether to sell a fund on a manager move, it also depends how crucial that fund manager is to the overall investment process.

Ryan Hughes, head of active portfolios at AJ Bell, says: ‘When assessing a fund, it’s important to understand who is making the decisions. Is it an individual or is it a team? Knowing this can help you determine how critical that individual is and then what course of action you should take if they leave.’

One example is Edinburgh-based asset manager Baillie Gifford, which runs a team-based approach and so is not as reliant on one individual. Conversely, a high-profile manager such as Nick Train from Lindsell Train or Richard Pease from Crux Asset Management departing could have a dramatic impact on the fund.


One of the perils investors make – both DIY and professional – is
to buy a fund or share at the top, when it has been performing well, and sell it at the bottom, after a period of poor performance. This is
among the most damaging things you can do to your portfolio.

Every fund manager will go through periods of underperformance. Sometimes these bad runs can extend, but how do you know when a short-term blip has become a long-term problem? When should you hold your nerve, and when should you get out?

Hughes says that determining this means you have to delve a little deeper into the source of the underperformance.

‘It’s very important to understand why a fund is underperforming rather than just sell it because it is underperforming,’ he says. ‘For example, if its investment approach is out of favour, then it should be expected to underperform.’

‘The key to this is giving yourself the best chance of understanding how a fund manager invests before you part with any of your money.

‘In this way, you give yourself a frame of reference that can help you judge when a fund should do well and when it is likely to struggle. You are then prepared for any periods of underperformance and can make rational decisions rather than reacting to performance numbers that may on the face of it look poor,’ says Hughes.


When a fund performs well, particularly if other funds in your portfolio have floundered, it can end up representing a large proportion of your entire portfolio.

One of the hardest things as an investor is selling units in a fund that has outperformed, as your instinct is to keep backing the fund as it rises. However, by letting one fund become disproportionately large in your portfolio you increase your risk. If that fund underperforms, the manager departs or another event occurs, you could be putting a large sum of your money at risk.

Hughes says: ‘Ideally, you want all holdings to have a meaningful impact on your overall performance but at the same time don’t want to be too exposed to an individual fund that could be detrimental to your performance.’


He recommends having between 10 and 20 different holdings in your portfolio, spread across different asset classes, regions and styles. This is a small enough number to monitor, but large enough to be diversified.

If a fund is getting too large in your portfolio, and you are a regular investor you could just commit new money to your other holdings, and not the fund that you’ve built up a large position in. This saves you trading costs from selling and rebuying, and avoids the mental block of selling a winner.


After launch, once funds have a proven track record, they can become more popular (assuming the performance has been good). This means the fund would grow in size. Often this works in investors’ favour, as it spreads some fixed costs across more people and charges may drop.

However, every fund has a limit, and if a fund gets too large the manager may find it hard to find enough suitable companies in which to invest.

There is no golden rule on size, as it depends what the fund invests in. A fund investing in large FTSE 100 companies, or across all US companies, for example, will have a large limit. Conversely, a fund that invests in small UK companies or in niche areas, such as pharmaceuticals, may have a lower limit.


Some fund managers publicly state what their limit is (some of these then revise the figure higher as they get close to the original limit), while others are more tight-lipped.

The best things to look out for are rapid growth in a fund, checking when funds running comparable strategies closed their doors to new investors, and any previous pronouncements from the fund manager on their optimum fund size.


As you get older and your life circumstances change, you need to look again at whether the funds you own are still right for you.

Someone starting out saving and investing in a fund at the age of 40 may find the same fund is no longer right for them at the age of 60 or 70.

Likewise, if you have a life event, such as being made redundant or having a child, and realise you may need access to your money sooner than you thought, you may need to check your funds are still right for you. This is most obvious when someone nears retirement age and may want to de-risk their portfolio, or start drawing an income from it.



Hughes says: ‘The overriding point is that you should ensure that each holding is right for you and that you know why you are investing in it.

‘A sage piece of advice I was given early in my career is to be an investor not collector, meaning ensure you understand your overall portfolio rather than simply viewing your portfolio as a collection of individual investments.’

Laura Suter, personal finance analyst, AJ Bell

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