Just when you thought investing was easy to understand – you put your money into shares, property, fixed interest, cash, etc. – your adviser starts talking about “investment styles”! What do advisers mean by “investment styles”? In essence, this is how fund managers choose the underlying investments of their funds.
There are two traditional ways of choosing stocks that active fund managers use – growth and value.
- Growth managers choose shares or companies for which they expect capital gain through improved company earnings. They tend to look in areas of the economy that they anticipate to 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.
And then there is GARP or “Growth at a Reasonable Price” and Style-Neutral.
- 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.
In addition to active fund management, there is also passive fund management with two common strategies being 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 S&P/ASX 200 in the stocks that the fund holds. Generally these funds will perform in line with the market.
So when your adviser talks about asset allocation, he or she is also taking into account diversification across the investment management styles as well.
Smart investing is not as easy as it sounds and choosing from the various different investment styles means taking into account each individual’s situation. You can learn more about investment basics here.
Of course, we’re always happy to do the work for you. Just get in touch.
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