In essence, ‘investment styles’ refer to how fund managers choose the underlying investments of their funds. Investments in a fund may be either actively or passively managed.
Actively managed funds require the use of human capital, or ‘people power’. A professional money manager or team/s, makes the investment decisions for the fund, relying on analytical research, personal judgment, and forecasts. Actively managed funds aim to outperform the market, and as such, they are also higher risk.
The two traditional ways of choosing stocks that active fund managers use are growth and value. There is also GARP or “Growth at a Reasonable Price” and Style-Neutral.
- Growth managers choose shares or companies for which they expect capital gain through improved company earnings. They tend to look at areas of the economy that they anticipate will do better than the market average and companies within those areas with the most growth potential.
- Value managers look for stocks with undervalued assets that they believe are trading at less than their intrinsic value. They analyse the company’s finances thoroughly to work out a ‘fair value’ for the stock by looking for low price to earnings (P/E) ratios, low price to book ratios, high dividend yields, and other key indicators of a company’s value.
- GARP is a mix of the growth and value styles. Here the focus is on stocks that have a stronger growth outlook than the market, but which are cheaper than the average stock bought by a growth manager.
- Style-Neutral management uses intensive fundamental analysis of companies to determine their long-term worth. As the name implies, this manager does this without a specific style bias.
Passively managed funds seek to replicate the performance of their benchmarks, rather than outperform them. Two common strategies of passive fund management are index and buy and hold.
- Buy and Hold managers operate on the principle that ‘time in the market’ is more important than ‘timing the market’. They buy and hold shares in the belief that the value will increase over the long term despite any short-term volatility.
- Index managers aim to reflect a specific index like the ASX 200 in the stocks that the fund holds. Generally, these funds will perform in line with the stock market.
When we refer to asset allocation, we’re also considering diversification across the investment management styles as well.
Smart investing is not as easy as it sounds. While we can’t be responsible for the investment market returns, we’re here to help you understand how the investment strategies we recommend will help you meet your goals and suit your appetite for risk.