Navigating style drift: How to assess your investment strategy’s integrity

By contrast, two Ninety One portfolio managers – one a deep value and the other a quality investor – have spent the past two decades holding their investment philosophy and process constant, even as it cost them periods of relative underperformance. And, in an unexpected twist, their two vastly different investment disciplines have led them to some similar stocks.

When to sell?

While you should not alter your investment strategy or its execution unless it was incorrect at the outset, or your personal or financial circumstances change, we have previously identified several warning signals that should trigger the re-evaluation of your investment strategy.

A key trigger we identified was “Evidence of investment philosophy drift.” When selecting a fund to assist you in meeting your long-term investment objectives, you may have done so based on the portfolio manager’s investment philosophy, for example value, growth or momentum focused.

It may be that after a period of underperformance because the investment style has been out of favour (value underperformance for much of the post-GFC period, and quality underperformance post Covid, for example), the portfolio manager starts to drift away from his stated investment philosophy. This style drift will likely result in the fund not meeting its investment objective over time, nor fulfilling the role for which you selected it. This should trigger the re-evaluation of your investment strategy.

Value investing: patience as the price of return

John Biccard, portfolio manager of the Ninety One Value and Global Value Funds, recently reinforced the importance of staying true to your investment philosophy and process.

John is a contrarian, deep value investor. He actively seeks out unloved, out-of-favour companies, often where management is ridiculed, and the company is priced for disaster. He then looks to eliminate certain stocks; those with too much leverage (think African Bank), or where there is risk of obsolescence (think Kodak). He then waits for the stock to re-rate.

As a result, he is often accused of buying and selling too early, a fact that he readily admits to and one that will not change. John has previously stated that; “everything in the portfolio will always be cheap, no exceptions, no falling in love … all out at fair value.”

John has consistently applied this value investment philosophy over the more than 25 years that he has managed the Ninety One Value Fund. Over this period, he and his investors have had to endure prolonged periods for portfolio positioning to pay off. The shortest period was six months for the extreme “SA Inc. position” that he put into the portfolio prior to the 2024 SA national elections. The longest was four years for the platinum group metals position that he initiated in the mid-2010s. The result, however, is a long-term record of outperformance of both the benchmark and peers.^*

That excess return is, in effect, payment for the discomfort of holding out-of-favour shares.

Quality investing: resilience during downturns

While applying a materially different investment philosophy and process, Clyde Rossouw, portfolio manager of the Ninety One Global Franchise and Opportunity Funds, is equally committed to staying true to quality as an investment style.

Clyde, known for his rigorous quality discipline, is looking for companies that exhibit five key attributes:

• Enduring competitive advantages,
• Dominant market positions,
• Low economic sensitivity,
• Healthy balance sheets and low capital intensity, and
• Sustainable cash flow and effective capital allocation.

No exceptions.

As a result, do not expect to see material exposure to gold and precious metals shares in these portfolios, as they do not meet the team’s definition of quality, nor do many of the semi-conductor companies that are benefiting from the AI buildout.

Given the recent relative outperformance of these two sectors, funds staying true to a quality investment style have underperformed.

When Quality meets Value

Many traditional quality stocks are now trading at depressed valuations, as illustrated in the following chart of Ninety One Global Franchise Fund’s return on invested capital (ROIC, a measure of quality), versus its relative valuation (12-month forward price / earnings ratio) over the last 10 years.

The divergence is stark: ROIC has improved even as relative valuations have compressed toward decade lows – the market is pricing in far less quality than the underlying businesses are delivering.

Chart 1: Ninety One Global Franchise Fund ROIC vs relative valuation

At such depressed levels, some quality stocks have even become attractive to deep value managers like John Biccard. Scanning through the Value fund’s top holdings you will note several consumer staples stocks, e.g., Remy Cointreau, Pernod Ricard, Dr. Martens, Diageo, Heineken, Budweiser, and Beiersdorf. Consumer staples have traditionally been core holdings in quality-aligned portfolios.

More surprising though is that John recently bought his first global IT stock, the software company Adobe.

Software companies have recently been a key detractor from the relative performance of both Ninety One Global Franchise and Opportunity Funds. That is because the market took the view that AI would permanently disrupt all “software as a service” businesses, including Adobe and core Global Franchise software holdings LSEG (London Stock Exchange Group), Autodesk, Booking.com, ADP and Intuit.

While some software companies may be replaced by AI, many, like those listed here, are actively embracing AI into their service offerings. The Quality team’s analysis shows that these software companies have deep moats, proprietary data, regulatory lock-in, network effects, embedded workflows, or function as a system of record. Their share prices may have come under pressure, but their earnings have continued to grow.

This is what it means to stay true to an investment philosophy under pressure: not reacting to short-term discomfort but applying conviction consistently over time. It is the benchmark against which any change in a manager’s approach should be assessed. No exceptions. DM

Author: Paul Hutchinson, Sales Manager, Ninety One

The Ninety One Value Fund has outperformed both the Fund’s benchmark (70.0% FTSE/JSE All Share Index TR (ALSI) + 30.0% MSCI AC World (ACWI) Net Return (87.5% ALSI + 12.5% MSCI ACWI pre 01/05/2023)), and the ASISA SA Equity General category over all 3, 5, 10, 20 and since inception (30/4/97) to 30 June 2026. Highest and Lowest returns are those achieved during any rolling 12 months over the period specified. Since Inception simulation date 30.04.97: Jul-16 87.7% and Sep-98 -35.8% Source Morningstar