Many fund managers will attribute underperformance to a problem of style because it is easier than admitting it is a problem of competence. Notably fewer managers want to admit that style may also play a role when they are riding high. How can investors isolate whether style is at fault for a manager’s weak patch, or whether something more serious is at work? Juliet Schooling Latter, research director of FundCalibre gives us some pointers.
Every good fund manager will have periods of underperformance. It is a feature not a bug. By definition, an actively-managed portfolio will look different from the index. Over time, the hope is that a fund will deliver outperformance, but even the very best fund managers will not do so consistently.
Styles go in and out of favour. Andrew Lyddon, manager of the Schroder Recovery fund, says: “There have been multi-year periods in the recent past when the entire style of value investing has fallen deeply out of favour and underperformed the broader market significantly over those periods. It’s during those toughest times when value investors’ true colours are revealed.”
Those periods of underperformance can also be a good time to re-examine a particular area or sector. Buying good managers when they’re having a rough patch can be a route to stronger returns over time.
Assessment versus peers
These weak patches often reveal a fund manager’s strengths. It is easy to look good when the market is in your favour, but harder to maintain discipline when the market turns. Does a fund manager slump to the bottom of the performance tables, or outpace their peers even when their style if unfashionable?
Quality, for example, has been extremely out of favour, but there has been a significant difference between quality managers. In the global sector, for example, three or four high profile quality funds are hugging the bottom of the tables over one year. However, there are quality managers that have managed to perform in spite of their style. The JOHCM Global Opportunities fund, for example, is mid-table – around 20% ahead of the worst-performing quality funds over the past year*.
When making this type of assessment, it is also important to look at the purity of a fund manager’s approach. For quality managers, for example, do they stick to traditional quality sectors such as consumer staples and healthcare or are they willing to invest more flexibly? Neither approach is right or wrong, but it will lead to different outcomes.
Rob Lancastle, co-manager of the JOHCM Global Opportunities fund, explains how their approach differs: “We tend to look at about 20% of the market, and that will include cyclicals and selected capital-intensive businesses. Pure quality funds will look at the right-hand 5% of our 20%. We think that 15% difference can be the most interesting, engaging part of the market.” This has helped them allocate more flexibly in the current difficult patch for traditional quality sectors, such as healthcare, pharmaceuticals and software.
Similar discrepancies can be found between value managers. Lyddon says: “There are typically multiple reasons which at face value ‘explain’ why the cheapest stocks in the market trade on such low multiples (perhaps relating to their growth, cyclicality, leadership, balance sheets, or some combination of these issues), and it’s our job to do the hard work of separating the hidden gems from the value traps. In other words, it requires considerable effort and determination to push into deeper value for investors.”
A manager’s small-cap versus large-cap bias can be a factor as well. Small-caps have been a difficult place to invest in recent years, and fund managers focusing on that area have had a headwind to performance whatever their style. Expecting a small-cap quality manager to deliver in line with a large-cap quality manager may be unrealistic.
Another factor to consider is style creep. Investors need to be very suspicious if their value manager decides they can suddenly find a case for holding AI stocks. When a specific sector has done very well, it can be harder to hold the line on style and active funds can start to herd. If a fund manager has significantly outperformed similar peers, it can be worth checking it hasn’t compromised its approach to do so.
The right benchmark
Comparing like with like is important. Comparing an active fund with a strong style against any of the main indices has been tricky in recent years. The march of the technology giants has been a significant headwind for anything other than purist growth investors. Even they may struggle where risk limits won’t let them hold these mega-caps at the same weights they are found in the index.
Yet most funds continued to favour generalist benchmarks. Schroder Recovery, for example, has the FTSE All Share as its stated benchmark, rather than a specific ‘value’ index. Style-based benchmarks can be a useful point of comparison. Has a quality manager outpaced the MSCI World Quality index, for example? Or a UK-based value manager outperformed the MSCI United Kingdom Value index?
The final factor to watch is what happens when the market starts to pick up. If the market starts to turn in favour of a particular style, but performance isn’t improving, you know you’ve got a dud. For example, more recently, some typical ‘quality’ sectors have revived – notably healthcare – which should be reflected in the performance of quality managers.
Style can be a reason for a fund’s underperformance, but it needs to be examined carefully. Styles do go in and out of favour, but style is not destiny and good fund managers should be making the best of a tough situation.
*Source: FE fundinfo, at 9 July 2026
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
Main image: measure, measuring tape, diana-polekhina-iUfusOthmgQ-unsplash
