Investment style

Further information: Style investing § Classification, and Investment strategy § Strategies

Investment style, [1] is a term in investment management (and more generally, in finance), referring to how a characteristic investment philosophy is employed by an investor or fund manager. [2] [3] Here, for example, one manager favors small cap stocks, while another prefers large blue-chip stocks. The classification [1][3] extends across asset classes — equities, bonds or financial derivatives — and within each further weighs factors such as leverage, momentum, diversification benefits, relative value or growth prospects.

Major styles include the following:

* Active vs. Passive: Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well. Passive investors, on the other hand, feel that simply investing in a market index fund may produce potentially higher long-term results (pointing out that the majority of mutual funds underperform market indexes). Active investors feel that a less efficient market (prices inhering all news, and hence potential) should favor active stock selection: for example, smaller companies are not followed as closely as larger blue-chip firms, and may then trade at a discount to true value. The core-/satellite concept combines a passive style in an efficient market and an active style in less efficient markets.

* Growth vs. Value: Active investors can be divided into growth and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%.[citation needed] Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their business cycle. A value investor is primarily attracted by asset-oriented stocks with low prices compared to underlying book, replacement, or liquidation values. These two styles may offer a diversification effect: returns on growth stocks and value stocks are not highly correlated, thus by diversifying between growth and value, investors may reduce risk and still enjoy long-term return potential.

* Small Cap vs. Large Cap: Some investors use the size of a company as the basis for investing. Studies of stock returns going back to 1925 [citation needed] have suggested that "smaller is better," and on average, the highest returns have come from stocks with the lowest market capitalization, the so-called "Size premium". At the same time, small-cap stocks have higher price volatility, which translates into higher risk.[4] (Also, there have been long periods when large-cap stocks have outperformed.) Some investors then choose the middle ground and invest in mid-cap stocks seeking a tradeoff between volatility and return. [1]

## See also

* Style investing
* Style drift
* Returns-based style analysis
* Asset allocation
* Financial risk management § Investment management
* Growth investing
* Value investing
* Low-volatility investing
* Momentum investing
* Quality investing
* Magic Formula investing
* Conservative Formula Investing
* Buy and hold

## References

1. ↑ 1.0 1.1 1.2 Mutual Fund Investment Styles, AXA Learning Library (Archived)
2. ↑ Investment philosophy, nasdaq.com/glossary
3. ↑ 3.0 3.1 Investment Philosophies, Aswath Damodaran
4. ↑ "Are small cap companies more risky investments than large cap companies?". https://www.investopedia.com/ask/answers/022715/are-small-cap-companies-more-risky-investments-large-cap-companies.asp. Retrieved 29 January 2019.

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