Style investing
Style investing is an
Style investors, then, make portfolio allocation decisions by placing their money in broad categorizations of assets, such as
Styles enable
Asset pricing
Style investing can be used in the study of
As above, style investing generates co-movement between individual assets and their styles. [3] Momentum and reversal patterns exist both at style level and security level and style investing plays an important role in the predictability of returns.[3]
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”.[4]
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 index, its co-movement with the index increases while its co-movement with stocks outside of the index declines and possibly hurting performance.[5]
Classification
When classifying securities into styles, investors group together assets that appear to be similar, in the sense that they have a common characteristic. (Styles may then overlap asset classes.) 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.[1] Other characteristics used as the basis for a style are based on size, risk, valuation, price return, or profitability. Value investing is well-known and emerged as a distinctive equity style following the work of Graham and Dodd (1934).[1]
Stocks can be split into categories such as
Financial industry
Financial firms Lipper and Morningstar developed and refined categorization systems and Style Box tools to aid with classification in the 1970s[6] and 1990s.[7] Also major index providers such as 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.
See also
- Style drift
- Returns-based style analysis
- Low-volatility investing
- Sector rotation
- Size premium
- Value investing
References
- ^ a b c d e f "Style Investing" (PDF). Harvard Institute of Economic Research.
- ^ Barberis; Shleifer. "Style Investing" (PDF).
- ^ a b Wahal, Sunil; M. Deniz Yavuz. "Style Investing, Comovement and Return Predictability" (PDF).
- S2CID 261997541.
- )
- ^ Lim, Paul (1998-12-13). "Lipper's New Categories May Look Like Morningstar's, but They're Not". Los Angeles Times. Retrieved 2021-01-25.
- ^ Polyak, Ilana (June 1, 2010). "Style Setter; By creating a taxonomy for mutual funds, Morningstar's Don Phillips has helped advisors build better portfolios". Financial Planning. 40 (6): 47 – via Factiva.