Dr. Eckhard Weidner, Head of Product Specialists Systematic Equity, AllianzGI
Recent years have seen sharp swings in market sentiment. How has the Best Styles approach held up in this environment?
It has been a challenging period for active management. Predicting which stocks, sectors or investment styles will outperform has been particularly difficult. We have seen sharp market rotations driven by news flow and events, alongside powerful and persistent trends such as the AI buildout.
Given these market rotations, one might expect a systematic equity approach such as Best Styles to face similar challenges. But Best Styles has not only held up well – it has performed very strongly. Our global and regional Best Styles strategies have outperformed their respective benchmarks by up to 4% per annum over the past three years.
How has Best Styles' multi-factor approach helped navigate volatility?
The AI theme is a good example. Many AI-related stocks became highly valued placing them at the opposite end of the spectrum from value-oriented stocks. Earlier this year, we saw a significant correction in some highly valued AI-related names following the release of DeepSeek in China. At that point, value stocks came back into focus and delivered relative outperformance.
The Best Styles strategy portfolio benefits from exposure to different parts of the market. So while momentum-driven or trend-driven investments such as AI-related stocks may outperform at certain times, other styles that we invest in, such as value, can provide balance when market leadership changes.
What advantages can a multi-factor approach offer in an environment of persistent uncertainty?
Uncertainty around political decisions and market events is unlikely to disappear, making it difficult to predict which investment styles or types of stocks will outperform.
In this context, a multi-factor approach seeks to capture a range of investment characteristics and styles, helping to build a more robust portfolio that can perform across different market environments.
Given the difficulty of forecasting market direction, we believe it makes sense to take a diversified approach that combines multiple factors and investment styles, as this increases the likelihood of participating in returns wherever opportunities emerge.
Is there a concern regarding concentration risk today?
A relatively small group of stocks has been responsible for a significant share of market returns. Investors with no exposure to these names have, at times, risked being left behind.
It is important to participate in the returns generated by market leaders, like the Magnificent Seven, but at the same time, they are not the only source of returns. If leadership broadens or those stocks experience a correction, investors may miss opportunities elsewhere.
The most effective approach is to build a portfolio that can benefit both from the concentrated returns generated by a small number of stocks and from the breadth of opportunities available across the wider market.
What role can diversification across factors and styles play when market drivers change quickly?
When market conditions change rapidly, it is extremely difficult to react in real time. In theory, perfect market timing would be ideal, but in practice markets adjust quickly and prices incorporate new information very rapidly.
For that reason, we believe it is better to build a robust and diversified portfolio that captures multiple factors and investment styles. Rather than trying to anticipate every market event, investors can position themselves to benefit from a variety of outcomes and market environments.
Are there areas of the market that investors may be overlooking?
Our approach works particularly well in areas where there is the greatest potential for diversification; where we have a broad opportunity set from which to generate returns and manage risk.
Emerging markets is one area. A year ago, many investors looking to diversify away from the US focused primarily on Europe. Meanwhile, emerging markets performed well but may not have received the same level of attention. The same could be said for parts of the Pacific region, including Japan, where investors remain cautious.
US small caps is another area where we see attractive potential, both in terms of returns and as a means of diversifying away from a highly concentrated [large-cap] market.
What should investors be watching over the next 12 months?
Two themes stand out.
The first is the potential for broader market participation. We have experienced a period of significant concentration, but that is unlikely to persist indefinitely. As the AI theme continues to develop, the benefits will eventually need to extend beyond a relatively small group of companies. Investors should pay close attention to signs of market broadening and the emergence of opportunities across a wider range of sectors and businesses.
The second theme is the importance of looking beyond the day-to-day news flow. While geopolitics continues to generate uncertainty and market volatility, investors should also focus on developments in the real economy, particularly inflation and interest rates.
Recent trends in inflation and interest rates, especially in Europe, have important implications for different investment styles. In this environment, value stocks can benefit from supportive conditions and may enjoy a degree of tailwind.
Investors should therefore avoid focusing exclusively on AI and the small number of stocks currently driving market performance. While these themes remain exciting, the broader economic backdrop may also create opportunities for other types of businesses, including more traditional companies involved in manufacturing, industrials and physical infrastructure.
Investing involves risk. Past performance does not predict future returns.
