style investing

style investing

An active portfolio management strategy that uses certain signals to determine whether to switch into identifiable equity segments, in particular, whether to move from growth stock to value stock or the reverse, or from small-cap stock to large-cap stock or the reverse.

Case Study Style investing became increasingly popular in the 1980s and 1990s as a growing number of investment managers decided they could improve performance by rotating their portfolios among various investment segments. Rather than limiting their investments to only growth stock or only value stock, managers attempt to make gains by moving from one segment to another as conditions warranted. Style investing is based on the belief that certain identifiable equity segments do well over time but do not necessarily do well at the same time. For example, growth stock beats value stock during some periods, while value stock outperforms growth stock during other periods. Likewise, small-cap stock outperforms large-cap stock during certain market periods, with the converse also being true. A portfolio manager who practices style investing rotates from one equity segment to another depending on that manager's view of the market. For example, a manager may feel that a substantial decline in consumer confidence indicates a portfolio should be heavily weighted toward value stock. Successful style investing assumes the portfolio manager can accurately forecast which segments of the market will produce superior returns. Critics argue that style investing increases transaction costs and relies on the faulty assumption that investment managers have predictive abilities.