Have you ever stopped to consider the different types of ‘investing styles’ that constitute your investment portfolio? Or perhaps more to the point. Have you ever stopped to consider that having a better understanding of investment styles could help you develop a better and more productive relationship with your wealth manager?
Table of contents
- What is an investing style?
- Understanding the “value” and “growth” investing styles
- Investing styles by market cap
- How an understanding of investing styles fosters a stronger relationship with your wealth manager
- We believe all Canadians should have a safe place to ask questions
In this blog post, we’ll discuss the most common investing styles used by asset managers today. Plus the benefits that come with having a more well-rounded understanding of how investing style affects portfolio construction. We’ll also cover the types of questions you should ask your advisor.
What is an investing style?
An investing style, also commonly referred to as the investment philosophy or investment strategy, is the portfolio manager’s approach to building and maintaining portfolios. It sets the overarching investment discipline and strategy. In addition to identifying certain qualities or characteristics the manager is looking for when analyzing potential investments. In other words, the investment style defines how the wealth manager will achieve the portfolio’s investment goals.
Investment styles can be divided, and further sub-divided, in a number of different ways. Our focus will be on the two most popular dimensions: the value vs. growth and market capitalization investment styles.
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Understanding the “value” and “growth” investing styles
By now you may already be familiar with certain professional money managers who will adhere to – and even market themselves as – following a strict investment discipline. These disciplines have traditionally fallen under either the “value” or “growth” style of investing.
Value investing style
The value style of investing has gained prominence and widespread adoption since the 1990s. This is due to the research of 2013 Nobel Prize winner Eugene Fama and his partner Kenneth French. Their revolutionary work developed the now widely recognized Fama-French model. Essentially, the model suggests the shares of companies with low P/E ratios, high dividend yields and offering a conservative relationship between their market values and value of the shareholder’s equity will tend to outperform the market in the long run. As well, the argument in support of value investing has certainly been helped by Warren Buffett, the world’s most famous and successful investor. He was mentored under the late Benjamin Graham, who many investors refer to as the “Father of Value Investing.”
Growth investing style
With that said, there are other investors who will opt to follow a different approach to finding undervalued investments. Rather than focusing efforts on developing forecasts for next year’s earnings or the expected value of a dividend to be received today, these growth investors will take a step back and focus on the big picture. The goal is to gain a high level perspective in relation to investments. This is known as the growth style. Growth investors are willing to look past what value investors may consider “unreasonable valuations” based on a firm’s current earnings. Instead, they focus on what the company in question might look like ten years from now. Or in some cases, beyond ten years!
As the manager of the Magellan Fund at Fidelity Investments, world-famous growth investor Peter Lynch averaged a 29.2% annual return for his clients between 1977 and 1990. He consistently doubled the returns of the S&P 500 during that 13 year period.
Hybrid investing styles
There are wealth managers out there who may opt for a balanced approach that employs a combination of these two philosophies. For some investments, a value investing style may make sense. Whereas for other investments, a growth investing style may be more suitable. This is precisely why wealth managers have value. They know the ins and outs of the market from experience and knowledge. This hybrid investing style is commonly referred to in the industry as “GARP” or “Growth at a Reasonable Price.” Meanwhile, investments that don’t fall neatly into either the value or growth category are often referred to as either “core” or “blend” investing styles.
Related Reading: How to Invest in Private Equity
Investing styles by market cap
Market capitalization is defined as the dollar value of the company’s outstanding shares. It is often used as a synonym for the size of the company. For example, there are “large-cap” stocks – stocks of multi-billion-dollar companies like Microsoft, Google, or Amazon. Then there are “mid-cap” stocks – companies like Canadian Tire would fall into this range.
There are even “small-cap” and “micro-cap” stocks. These are stocks of companies with market capitalizations typically less than $1 billion and sometimes even under $100 million. Companies of this size will usually carry a heightened degree of uncertainty or risk.
Just like some portfolio managers focus on value or growth investments, believing one style will deliver better results over time, some portfolio managers believe the size of the company will have an effect on returns. Understanding these investing styles helps investors make better decisions in relation to their portfolios. For those who work alongside a professional, understanding investing styles can facilitate more open and transparent client-manager relationships.
How an understanding of investing styles fosters a stronger relationship with your wealth manager
At this point, you might be thinking there’s a particular investment style – or perhaps even multiple investment styles – that you have more confidence in. Maybe you’re intent on finding the next Netflix, Amazon, or Shopify to substantially grow your returns! Or perhaps you have a family member or close friend who’s already convinced you of the battle-tested philosophy behind a value investing strategy. Alternatively, it’s possible you don’t have particularly strong feelings on the matter at all. You’re more than content to leave those types of decisions in the hands of the investment manager you’ve entrusted. Ultimately, when both the client and the manager have a clear and honest understanding of how investment styles fit into the framework of portfolio construction and achieving the investor’s desired objectives, everyone wins.
The next time you’re sitting down with your advisor, consider asking them about their investment philosophy. Further, you can probe into their decision-making process and how their investing style fits into the system. You may also want to consider asking your advisor to provide you with a “style box”. This is designed to visually represent your portfolio across certain style categories. It includes size as well as the degree to which your investments contain qualities that are typically sought after by those adhering to either a value or growth framework.
In following this approach, you will come away with a more informed understanding of the different types of investments that make up your portfolio. You will also receive valuable feedback on how closely your investment manager pays attention to investing styles.
We believe all Canadians should have a safe place to ask questions
We’re finance nerds who want to share our love of wealth management with Canadians. Our experience has taught us that many Canadians don’t have a resource to turn to when they want to make a wealth management change. Or simply want to know more about the Canadian investment landscape. Whether you’re an experienced investor or a beginner, we’d love to hear from you to see how we might be able to help you out.
It may seem unusual to hear this, but we sincerely want to help investors. We want to show investors the good side of the financial industry. Our belief is that the best resources shouldn’t only be available to the wealthiest individuals. We created WMC with the vision of helping all Canadians gain access to the best financial resources in order to invest their money wisely based on informed decisions.