What Is Style?
Style refers to the investment approach or objective that a fund manager uses. Style guides how a fund manager selects securities for the fund's portfolio based on their knowledge, skill, and understanding of the market. While there are a variety of styles, there are nine basic investing styles for both equity and fixed-income funds. For stock funds, company size and value/growth characteristics determine the style. For bonds, style is defined by maturities and credit quality.
- Style refers to the investment approach that a fund manager uses in their investment fund.
- The chosen style determines how an investment manager picks securities, manages risks, and directs the course of the fund.
- There are nine basic investment styles that come with variations depending on if the style is focused on equities or fixed income.
- The investment style is laid out in a fund's prospectus, which not only details the style, but also the risk tolerance, fees, expenses, and performance.
- To evaluate the style of an investment manager, a prospective investor can look at the fund's performance as well as reviews from financial services companies.
The nine basic investment styles are:
- Large value
- Large blend
- Large growth
- Medium value
- Medium blend
- Medium growth
- Small value
- Small blend
- Small growth
The style of equity investments is determined by size and value/growth characteristics. The specific size parameters for stocks are large-, mid-, and small-size companies, which are determined by market capitalization. Value, growth, and neutral are the three basic value/growth categories for stocks.
The style of fixed-income investments is determined by term and credit. Bond maturities are categorized as short term, intermediate term, and long term. Credit quality is determined by a bond's status as a government or agency issue and credit ratings for corporates and municipals of 'AAA' to 'AA' (high), 'A' to 'BBB' (medium), and 'BB' to 'C' (low). These ratings are most commonly classified as investment grade or non-investment grade.
Variations and combinations of these basic categories, as well as consideration of special industries, industry sectors, and geographic location, create investment styles for both stock and bond funds beyond the basic nine categories for each.
The investment style that an investment manager chooses to utilize in their fund is based on their knowledge of the above characteristics. The style they implement in their fund usually never changes, as that is the reason investors choose that specific fund.
Funds managed by all types of investment managers in the investment industry include investment documents that provide in-depth details on a fund’s investment style. Registered funds are more transparent, as directed by the Securities Act of 1933 and the Investment Company Act of 1940. Hedge funds and other alternative funds will also provide investment style disclosures in various forms for their investors.
In the registered universe, funds must file a prospectus and statement of additional information with their registration. A fund’s prospectus is typically the primary source of information for investors seeking to understand a fund’s investment style. Along with investment style, the prospectus will also disclose details about the levels of risk an investor can expect with the fund, fees, expenses, performance, and the types of investors who would find the fund to be the best fit.
If the investment manager decides that they will change the style of the fund, then this needs to be conveyed to the investors well in advance of doing so; giving the investors enough time to redeem their money if they no longer wish to invest in that style.
The easiest way to evaluate an investment manager's style is to look at the performance of the fund. If the fund is consistently generating positive returns, it is clear the investment manager is skilled and the chosen investment style is working.
It is important to assess the performance of a fund over a long period of time to ensure that the fund has operated through many business cycles. It can be easier for a fund to perform well for one year in a booming economy, but how will that fund perform when the economy enters a recession? Evaluating the investment style over a longer period of time can indicate how the manager will handle tough times in the economy.
There are also many financial services firms that evaluate funds and their investment styles, assessing many factors and providing ratings. One of the most popular companies that analyzes and ranks funds is Morningstar.