Style labels attached to fund management houses may be misleading clients by not appropriately differentiating between manager types, nor correctly assessing their performance, according to research in the US by strategic consultancy group Barra.

In a paper entitled “Style is dead. Long live style!”, Barra argues that the current framework of style classification has let down investors, who have found that their portfolios are not as diversified by style as they expected – resulting in unanticipated risk exposures and performance shortfalls.

However, the consultant does not suggest throwing the baby out with the bathwater.
Instead, Barra argues that new technology is allowing investors to take a more multi-faceted view of style.
Consequently, the firm argues that in the future there will be a greater demand for what it terms investment “skill”, above and beyond the style label.

This “skill” factor, defined as: “the excess return added after controlling for broad market movements and style exposures”, will, Barra argues, become the dominant criterion for selecting managers in the future.

As a result, Barra argues that those investment managers that can articulate their investment philosophy, document their multi-faceted style and validate their investment skill, will stand out from those who cannot.

The Barra research is available from the firm’s website