Investment style
Encyclopedia
Investment style refers to different style characteristics of equities
, bonds
or financial derivatives within a given investment philosophy.
Theory would favor a combination of big capitalization, passive and value. Of course one could almost get that when investing in an important Index like S&P 500, EURO STOXX or the like.
Also the degree of financial leverage
and diversification
are also factors
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. The majority of mutual fund
s underperform market indexes.
Active investors feel that the small-cap market is less efficient since smaller companies are not followed as closely as larger blue-chip firms. A less efficient market should favor active stock selection. The core-/satellite concept combines a passive style in 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 value
s. There is also a diversification effect: Returns on growth stocks and value stocks are not highly correlated. By diversifying between growth and value, investors can help manage risk and still have high 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 have suggested that "smaller is better." On average, the highest returns have come from stocks with the lowest market capitalization (common shares outstanding times share price). But since these returns tend to run in cycles, there have been long periods when large-cap stocks have outperformed smaller stocks. Also, early on, small cap stocks had bigger premiums and were more expensive to buy and sell, but isn't easily captured in historical analysis, and in reality likely skewed total return for investors.
Small-cap stocks also have higher price volatility, which translates into higher risk. Some investors choose the middle ground and invest in mid-cap stocks with market capitalizations between $500 million and $8 billion — seeking a tradeoff between volatility and return. In so doing, they give up the potential return of small-cap stocks.
Mostly taken from www.axaonline.com/rs/3p/sp/5044.html#what's
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
or financial derivatives within a given investment philosophy.
Theory would favor a combination of big capitalization, passive and value. Of course one could almost get that when investing in an important Index like S&P 500, EURO STOXX or the like.
Also the degree of financial leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
and diversification
Diversification
Diversification may refer to:* Diversification involves spreading investments* Diversification is a corporate strategy to increase market penetration...
are also factors
Investor traits
The style is determined by- the temper and the beliefs of the investor.
- some personal or social traits (investor profileInvestor profileAn investor profile or style defines an individual's preferences in investment decisions, for example:* Short term trading or long term holding * Risk averse or risk tolerant / seeker...
) such as age, gender, income, wealth, family, tax situation... - generally, its financial return / risk objectives, assuming they are precisely set and fully rational.
Some styles
Active vs. PassiveActive 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. The majority of mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s underperform market indexes.
Active investors feel that the small-cap market is less efficient since smaller companies are not followed as closely as larger blue-chip firms. A less efficient market should favor active stock selection. The core-/satellite concept combines a passive style in efficient market and an active Style in less efficient markets.
Growth vs. Value
Active investors can be divided into growth
Growth investing
Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios...
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 value
Liquidation value
Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value...
s. There is also a diversification effect: Returns on growth stocks and value stocks are not highly correlated. By diversifying between growth and value, investors can help manage risk and still have high 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 have suggested that "smaller is better." On average, the highest returns have come from stocks with the lowest market capitalization (common shares outstanding times share price). But since these returns tend to run in cycles, there have been long periods when large-cap stocks have outperformed smaller stocks. Also, early on, small cap stocks had bigger premiums and were more expensive to buy and sell, but isn't easily captured in historical analysis, and in reality likely skewed total return for investors.
Small-cap stocks also have higher price volatility, which translates into higher risk. Some investors choose the middle ground and invest in mid-cap stocks with market capitalizations between $500 million and $8 billion — seeking a tradeoff between volatility and return. In so doing, they give up the potential return of small-cap stocks.
Mostly taken from www.axaonline.com/rs/3p/sp/5044.html#what's