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Concept
Investment style
Summary
Investment style, is a term in investment management (and more generally, in finance), referring to a characteristic investment philosophy employed by an investor.
The classification extends across asset classes - equities, bonds or financial derivatives - and within each may further weigh factors such as leverage, momentum, diversification benefits, relative value or growth prospects.
Major styles include the following, but see also and .
Active vs. Passive: Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well. Passive investors, on the other hand, feel that simply investing in a market index fund may produce potentially higher long-term results (pointing out that the majority of mutual funds underperform market indexes). Active investors feel that a less efficient market (prices inhering all news, and hence potential) should favor active stock selection: for example, smaller companies are not followed as closely as larger blue-chip firms, and may then trade at a discount to true value. The core-/satellite concept combines a passive style in an efficient market and an active style in less efficient markets.
Growth vs. Value: Active investors can be divided into growth and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%. Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their business cycle. A value investor is primarily attracted by asset-oriented stocks with low prices compared to underlying book, replacement, or liquidation values. These two styles may offer a diversification effect: returns on growth stocks and value stocks are not highly correlated, thus by diversifying between growth and value, investors may reduce risk and still enjoy long-term return potential.
Small Cap vs. Large Cap.: Some investors use the size of a company as the basis for investing.
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Style investing
Style investing is an investment approach in which securities are grouped into categories, and portfolio allocation is based on selection among "styles" rather than among individual securities. Style investors, then, make portfolio allocation decisions by placing their money in broad categorizations of assets, such as small-cap, value, low-volatility, or emerging markets. Some investors dynamically allocate across different styles and move funds back and forth between these styles depending on their expected performance.
Low-volatility investing
Low-volatility investing is an investment style that buys stocks or securities with low volatility and avoids those with high volatility. This investment style exploits the low-volatility anomaly. According to financial theory risk and return should be positively related, however in practice this is not true. Low-volatility investors aim to achieve market-like returns, but with lower risk. This investment style is also referred to as minimum volatility, minimum variance, managed volatility, smart beta, defensive and conservative investing.
Style drift
Style drift occurs when a mutual fund's actual and declared investment style differs. A mutual fund’s declared investment style can be found in the fund prospectus which investors commonly rely upon to aid their investment decisions. For most investors, they assumed that mutual fund managers will invest according to the advertised guidelines, this is however, not the case for a fund with style drift.