"Style purity" has become the buzzword of the investment industry. With value managers trying to slip growth stocks into their portfolios and large-cap managers sneaking small-cap stocks, it has become tougher to find a manager that sticks to its investment philosophy.
Now, Paradigm Asset Management Co. LLC, a New York-based manager that copies the publicly available stock picks of the best managers it can identify, is offering an analytic tool to help institutional investors understand manager strengths and weaknesses, identify sources of alpha and keep managers honest.
By carving up U.S. equity portfolios into their constituent parts by style -- large-cap value and growth and small-cap value and growth components -- "all of a sudden we have created style purity where there was none," said Tom Philips, Paradigm chief investment officer.
For example, a Paradigm analysis of Fidelity's flagship Magellan Fund revealed its average one percentage point outperformance of the Russell 3000 index in the 1990s stemmed primarily from making style timing bets and delivering exceptional small-cap performance. In the early 1990s, the fund was predominantly large value and small growth stocks, making a switch to large-cap growth after 1995, according to Paradigm.
But the $101 billion fund's tighter asset allocation policy of recent years -- eliminating bonds and shrinking cash --raises several issues. The Paradigm analysis asks:
* Is style timing an important part of the fund's strategy, or does it stem from Fidelity's stock-picking process?
* Will style timing work as well for Magellan in the future?
* Can the fund boost performance of its large-cap and midcap components, which account for 69% and 25%, respectively, of the portfolio?
* Can Fidelity restore the quality of its small-cap stock picking -- traditionally the source of much of the fund's outperformance?
A Fidelity spokeswoman said the Magellan Fund is built stock by stock and is not dependent on style or capitalization factors.
"The fund's composition, whether you look at market-cap distribution or whether or not (it's) tilted toward growth or value, is a result of (portfolio manager Bob Stanley's) choices of individual companies," she said.