Abstract

In the long-term transition from generalist managers to specialty managers, style has been overlooked. The overall style of the equity portion of institutional pension funds, however diversified, is either unmanaged or mismanaged, resulting in overweighting of the style that has the best recent performance.

Most funds now diversify among a variety of management styles — large-cap, small-cap, growth, value, and so on. The growth managers will not buy low-PE stocks. The value managers will not buy high-growth stocks. The large-cap managers will not buy small opportunistic companies, and the small-cap managers will not buy large companies.

Should managers deviate by buying stocks outside their normal style domain, they can be fired by the sponsor community and stricken from the approved list by consultants. Consequently, the only time a manager risks changing style is when results have been dreadful, a demonstrably poor strategy.

The result is that the active management of style in today’s world of specialists occurs only at the sponsor level, most often in the wrong direction at the wrong time. Sponsors were giving up on large-cap managers in 1983 and 1984, on growth managers in 1986 to 1988, and on small-stock and value managers in 1990, only to see superior results in the very style they had just abandoned. At best it is structurally difficult (in many organizations impossible) to persuade a pension committee to boost exposure to a style that has recently been unsuccessful.