Most mutual fund investors believe investing in a well-diversified portfolio— a mix of funds from various managers and categories—is enough to pass the fitness test. However, recent years have shown the emergence of a key element of diversification that could drive performance: style diversification.
Taming market pendulum
Asset managers have a distinct style ethos, worlds apart from glamour and fashion. They have a certain taste in investments, reflected in their fund outcomes. Asset management companies (AMCs) tend to adopt certain styles. Some are wedded to a single style across all fund strategies, others apply differentiated styles in different funds, and a few exhibit style-elasticity within individual funds.
A recent study by Share.Market, a division of PhonePe Wealth, throws light on the style inclinations among larger- and mid-sized AMCs. While , HSBC, and Invesco exhibit a distinct bias towards ‘quality’ style, others like HDFC and Mirae Asset prefer ‘value’ style in their fund strategies.
In recent years, it has become increasingly clear that asset managers’ style preferences significantly impact performance. Depending on market conditions, AMCs favouring a particular investment style may outperform or lag. When the market tilts toward value, funds with a ‘value’ bias tend to lead, while ‘growth’-oriented funds underperform. Investors often get caught in this cycle, chasing past winners only to be left behind when the style falls out of favour.
Share.Market’s analysis of recent years shows a clear pattern: in the last five years, funds exhibiting high performance derived their edge from strong ‘value’ or ‘momentum’ leanings, or a combination of both. ‘Quality’ style took a backseat in this period as AMCs that were heavily biased towards quality suffered across fund mandates. In contrast, quality-driven funds were scorching the performance charts during 2018-2020.
How AMCs stack up on style exposure
The table shows breakdown of the number of funds having high scores on each of the investment style factors.
Value, momentum-tilted funds fared well
Market trends shift, so ‘quality’ may lead the next winners.
To keep up, several AMCs have now adopted style diversification. Some run different investment styles for different funds or remain style-neutral at scheme level. Scripbox Founder & CEO Atul Shinghal notes, “The market has forced AMCs to change rigid stances and move to a more diverse approach across styles, as performance gets skewed towards particular styles.”
The Share.Market study identifies many AMCs that show no clear style preference. SBI, Aditya Birla Sun Life, Bandhan , and Quant seemingly run a more diversified approach. Of ICICI Prudential’s nine funds, three showed a ‘value’ bias, but no such leaning was seen in its other strategies. Two out of nine funds exhibit a ‘value’ tilt, while three others have a proclivity for ‘momentum’. The rest are styleneutral. A few schemes from these fund houses have exhibited consistent outcomes without a strong style tilt.
No holy grail
A fund house’s style inclinations do not necessarily make it any better or worse. Some AMCs’ capabilities are geared towards a specific investment style. Others find comfort in running different styles, harnessing individual fund managers’ skillsets. Moreover, favourable investment styles alone do not ensure top-tier performance.
The study reveals that not all funds with favourable factor exposure over the past five years achieved strong consistency scores. Several funds succeeded while defying broad style categorisations, owing to superior stock selection, effective asset allocation, or other unique strategies.
For investors, preferring one approach over another is not the answer. Rather, those who identify and blend different investment styles—value, growth, quality, momentum—within their fund portfolio may fetch outcomes consistent across market cycles.
Avoid complexity
To be sure, style-based diversification adds a layer of complexity to fund selection. “For both investors and distributors, it’s no longer enough to rely on category names or past performance. One must evaluate whether a fund maintains style integrity or shifts tactics based on market phases,” says Shinghal, warning that diversification without clarity can quickly lead to style confusion. Further, interpretation of style can be tricky, experts argue. Nehal Mota, Co-Founder and CEO, Finnovate, says, “Style can be subjective and hence any long-term extrapolation of the factor (style) can vary from one fund manager to another.” Shinghal adds, “Many style definitions remain vague, and investors may struggle to grasp how they behave in different market phases.”