Style investing
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Style investing is an investment approach in which securities are grouped into categories and portfolio allocation based on selection among styles rather than among individual securities. Style investors can make portfolio allocation decisions by placing their money in broad categories of assets, such as
small-cap Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
,
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
, low-volatility, or
emerging markets An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or were ...
. Some investors dynamically allocate across different styles and move funds back and forth between these styles depending on their expected performance.


Asset pricing

Style investing can be used in the study of
asset prices In finance, valuation is the process of determining the present value (PV) of an asset. In a business context, it is often the hypothetical price that a third party would pay for a given asset. Valuations can be done on assets (for example, inve ...
and can serve as a useful framework for identifying anomalous price movements in stocks and study the relation between risk and return in asset pricing models. Style investing generates co-movement between individual assets and their styles. Momentum and reversal patterns exist both at style level and security level and style investing plays an important role in the predictability of returns. Barberis and Shleifer present a model where investors allocate funds based on the relative performance of investment styles which explains style momentum: "if an asset performed well last period, there is a good chance that the outperformance was due to the asset’s being a member of a “hot” style...If so, the style is likely to keep attracting inflows from switchers next period, making it likely that the asset itself also does well next period”. Style investing can also lead to mispricing when a security is re-classified such as when a stock is added to the
S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
index, its co-movement with the index increases while its co-movement with stocks outside of the index declines and possibly hurting performance.


Classification

When classifying
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
into styles, investors group together assets that appear to be similar, in the sense that they have a common characteristic. A characteristic can be an obvious one such as the country in which the security is traded, or the industry in which the firm operates. Other characteristics used as the basis for a style are based on size, risk, valuation, price return, or profitability.
Value investing Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham ...
is well-known and emerged as a distinctive equity style following the work of Graham and Dodd (1934). Styles are sometimes also referred to as
asset classes In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...
. Styles enable
institutional investors An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linke ...
to organize and simplify their portfolio allocation decisions, as well as to measure and evaluate the performance of professional managers relative to standardized style benchmarks. The implications of style investing could have impact on financial markets, making stocks move together. Stocks can split stocks into categories of
small-cap Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
,
mid-cap Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...
,
large-cap Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...
,
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
,
defensive Defense or defence may refer to: Tactical, martial, and political acts or groups * Defense (military), forces primarily intended for warfare * Civil defense, the organizing of civilians to deal with emergencies or enemy attacks * Defense indust ...
, cyclical, growth, international, regional, technology stocks, utility stocks, old economy or
new economy The New Economy refers to the ongoing development of the American economic system. It evolved from the notions of the classical economy via the transition from a manufacturing-based economy to a service-based economy, and has been driven by ...
, disruptive innovation, and so on. Classification of securities into categories is widespread in
financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
. Bonds are split into high-yield bonds and investment grade bonds and short-duration and long-duration bonds. Traders classify assets as
liquid securities In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...
such as
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
and public equity. They may also do the same with
illiquid securities In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between th ...
, such as
private debt In economics, consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In macroeconomic terms, it is ...
, illiquid hedge funds, direct real estate and
venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
.


Financial industry

Financial firms
Lipper Thomson Reuters Lipper (part of Thomson Reuters) is an American financial services firm. Founded in 1973 as Lipper Analytical Services, it was acquired by Reuters in 1998. Corporate history Lipper Analytical Services was founded in 1973 by secur ...
and Morningstar developed and refined categorization systems and Style Box tools to aid with classification in the 1970s and 1990s. Also major index providers such as
MSCI MSCI Inc. is an American finance company headquartered in New York City. MSCI is a global provider of equity, fixed income, real estate indexes, multi-asset portfolio analysis tools, ESG and climate products. It operates the MSCI World, MSCI ...
and FTSE offer a wide range of style-based indices. Also many asset managers offer style-based active strategies, sometimes also referred to as
factor investing Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Security characteristics that may be included in a factor-based approach include si ...
.


See also

*
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 shou ...
*
Sector rotation Sector rotation is a theory of stock market trading patterns. In this context, a sector is understood to mean a group of stocks representing companies in similar lines of business. The basic premise is that these stocks can be expected to perform si ...
*
Size premium The size premium is the historical tendency for the stocks of firms with smaller market capitalizations to outperform the stocks of firms with larger market capitalizations. It is one of the factors in the Fama–French three-factor model.
*
Value investing Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham ...


References


External links


Style Investing: YaleStyle Investing: Evidence from Mutual Fund FlowsStyle Investing: Merrill LynchStyle Investing: HarvardStyle Investing, Comovement and Return Predictability
{{stock market Investment Financial economics