Funds face extra scrutiny for style drift amid Covid-19

The pressure to beat benchmarks has never been greater amid markets plagued by coronavirus volatility. That's why asset owners should closely monitor their fund managers.
Funds face extra scrutiny for style drift amid Covid-19



With global financial markets being roiled by the impact of the coronavirus, it's never been more important for investors to take a particular focus on how well fund managers stick to their mandates, and whether they are seeing any key personnel changes.

Those were two of the key takeaways of a webinar about monitoring fund managers that AsianInvestor held with eVestment on Wednesday (May 27).

According to a live poll held during the webinar, 87% of the buyside audience said they preferred to know if their managers had style drift, even if it benefited investment returns, as they sought to calculate risks across their portfolios. 

That focus makes sense for asset owners, particularly given that volatility is likely to prove a common occurence across financial markets for much of the rest of the year.

John Molesphini, eVestment

John Molesphini, global head of insights at eVestment, said the fund data provider's analysis showed that some managers focusing on value and core equities had drifted into growth stocks under the current environment.

“You have seen outflows for years from value and core universes on the equity side, so it's not a surprise to see some managers potentially chasing growth, because they felt that is going to be a better opportunity to win money to keep the clients they have,” he said.

Market-leading institutional investors typically conduct quarterly manager monitoring to prepare for manager meetings and to flag potential investment risks. Being able to assess risks accurately gained even more importance during the first quarter of this year, given the double whammy of the Covid-19 crisis and a slew of political risks due to the widening rift between the US and China. 

Style drift is a key, but sometimes underrated risk. Fund managers that begin investing in a manner not warranted by the mandate they are hired to execute can create unexpected risk exposures that their asset owner customer does not anticipate. Multiply that drift risk over several external manager mandates and it can leave the asset owner potentially at risk of market exposures they didn’t even realise they possessed.

Investors should also understand if their managers are delivering the expected active share for which they hired them as it is typically tied with fees.

“You have the risks of someone who invests in investment-grade bonds now drifting to potentially high yield,” Molesphini said, citing the so-called "fallen angels" phenomenon, where investment-grade bonds are being downgraded by rating agencies to junk status due to the virus.

Style drift can take place in country-specific allocations, or between global and emerging market mandate. It can also take place in other aspects, such as duration, maturity, or the holdings' ratings, Molesphini added.


Given the uncertain environment, investors are increasingly looking at how their managers are coping with the crisis based on factors such as personnel changes, assets under management and whether they have lost or gained any accounts.

“This is a change that we haven't seen so much in the past, but you have more and more investors and their advisers and consultants looking for personnel changes,” Molesphini said.

Senior staff departures can be a major issue if a key personnel are integral to a particular investment style or mandate.

Senior staff departures can be a major issue if a key personnel are integral to a particular investment style or mandate. A series of senior investment team departures in recent weeks has highlighted the potentially major implications of such changes for client portfolios.

Fidelity International's Asia fixed income head Bryan Collins is set to leave on June 30, resulting in two of the firm's bond strategies being placed under review by fund research house Morningstar. He has been the lead manager of the Asian high yield portfolio since October 2009, and co-managed the China high yield strategy since November 2015.

BlackRock has also seen several senior executives leave recently, including Andrew Swan, former head of Asian equities, whose exit has led to a reshuffle of the portfolio management team.

The markedly difficult conditions since February have led investors to become generally more prudent in their investment plans, as some have delayed portfolio rebalancing, according to the presentation.

A Willis Towers Watson survey published on May 25 also found that around 80% of 183 global asset owners polled between April 27 and May 15 were struggling with making decisions in the uncertain environment.

The “new normal” of remote working arrangements due to the global lockdowns could also play a part in the firm's turnover rate, for example.

“In that kind of environment, if you are invested in a manager, really understanding the risks to you as an investor is, is that manager a viable option going forward?” Molesphini said.

To listen to the full webinar, please click this link

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