The sheer volume of funds available on the investment market – and the analytics and research around them – creates an array of challenges that any fund manager, fund buyer or investment consultant is all too familiar with. How do you determine the most relevant research and data to filter through to make the best decisions for building a fund, marketing it to investors or deciding to buy into it? And then, how can you assess what is driving a portfolio’s results? Is it still a strong option compared to other funds?
The limitation is that most information, even the high-end research and tools available to institutional investment professionals, only skims the surface. This leaves many gaps to fully understand the makeup, underlying exposures and potential risk within portfolios. The result is an incomplete analytical picture and funds appearing to be quite similar, even when they might not be.
The need for transparency when comparing funds
Making portfolio decisions across a multitude of funds – whether managing a fund or choosing to invest in one – can only be effective when an investment professional can confidently discern the distinctions between them. This requires directly comparing funds – one to another, to an entire peer group and to benchmarks – in clear, granular detail.
Funds typically are understood within broad style categories, such as “large growth” or “small cap global.” However, those descriptions are limiting. Without a deeper, comparative perspective, you might not see that by investing in two seemingly distinct funds, you are now overweight in a particular sector, or taking on more factor risk than your strategy had intended.
This is where peer comparisons, based on clear, understandable style factors, can deliver unforeseen insight into portfolios. Let’s suppose you are assessing two funds. Both are within the same broad style label and are tracking quite closely to a common benchmark, and somewhat consistently over several quarters. You might perceive that these two funds are largely similar. But if you drill down deeper into an array of “style tilts,” you may discover that certain style factors are telling a very different story.
Pinpointing the source of growth exposure
To demonstrate how detailed visibility into fund composition and style enables more precise comparisons, we used Peer Insights to examine two popular funds within a common peer group, using holdings-based portfolio analytics:
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With holdings data provided by Morningstar, Peer Insights analyzed a customized peer group of 61 active, fundamental, large cap growth funds. All hold 50-80 stocks and are in a “Large Growth” category. However, we can see that across a range of style related factors, there is quite a spread of Style Tilts™. Clearly these 61 funds, while very similar on the surface, are not proxies for one another.
In particular, it is interesting that there exists quite a range of Growth exposures within this set of peers (see green bars). We have plotted Columbia Large Cap Growth fund (in yellow square) and the JPMorgan Large Cap Growth fund (in red triangle). These products hold a similar number of stocks (68-78), and have an almost identical Book-to-Price exposure relative to the Russell 1000 Growth (see the first blue bar).
So, are they the same?
No, placing focus on the green Growth measures in the Peer Style Skyline™, we see a significant exposure to both higher historical sales growth and higher forecasted growth in the JP Morgan product. Meanwhile, the Columbia product is much more in line with the Russell 1000 Growth on these same measures. If investors are limited to picking Growth and Value funds by screening on size and a single measure like Book to Price, they wouldn’t see much difference. But now with Peer Insights, much more precision is available based upon what type of Growth they are looking for from their manager.
Peer fund comparisons can only be comprehensive, accurate and effective when a deeper analysis is performed at the style factor level. Comparing funds using these factors reveals unforeseen distinctions into the underlying drivers of portfolios. Understanding all the style angles with greater precision leads to new insights to better assess and manage weightings, risk and other exposures, and ultimately make clear and confident investment decisions.