Investment style,[1]
is a term in investment management (and more generally, in finance), referring to how a characteristic investment philosophy is employed by an investor or fund manager. [2][3]Here, for example, one manager favors small cap stocks, while another prefers large blue-chip stocks.
The classification [1][3] extends across asset classes — equities, bonds or financial derivatives — and within each further weighs factors such as leverage, momentum, diversification benefits, relative value or growth prospects.
Major styles include the following:
- 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%.[citation needed] 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. Studies of stock returns going back to 1925 [citation needed] have suggested that "smaller is better," and on average, the highest returns have come from stocks with the lowest market capitalization, the so-called "Size premium". At the same time, small-cap stocks have higher price volatility, which translates into higher risk.[4] (Also, there have been long periods when large-cap stocks have outperformed.) Some investors then choose the middle ground and invest in mid-cap stocks seeking a tradeoff between volatility and return. [1]
See also
References
- ^ a b c Mutual Fund Investment Styles, AXA Learning Library (Archived)
- ^ Investment philosophy, nasdaq.com/glossary
- ^ a b Investment Philosophies, Aswath Damodaran
- ^ "Are small cap companies more risky investments than large cap companies?". Investopedia. Retrieved 29 January 2019.
