Investing by style
Fund managers can choose between different styles of investing, for instance between shares defined as 'growth' or 'value', or according to the size of companies. Each style displays different characteristics and performs best in a particular economic climate. Typically, growth stocks tend to deliver strong performance in an environment of strong economic growth, while value stocks should perform better than growth shares in a downturn. Recognising the characteristics and catalysts that will drive the performance of shares from each style is crucial to successful asset selection.
Growth shares are generally those of companies that may already have demonstrated rapid price growth and offer the potential to continue to grow rapidly in the future. Larger capitalisation growth stocks may also display strong revenue gains achieved through corporate expansion or pricing power. Growth stocks are capable of achieving strong yet sustainable growth over the long term. They are typically found in sectors benefiting from scientific or technological breakthroughs and where demand for companies' products or services is expected to grow rapidly.
Value shares are stocks that are considered to be currently underpriced by the market and therefore represent an attractive investment opportunity. These are often shares in companies that are out of favour during boom periods and can be bought cheaply relative to their historic performance record, or that can be expected to flourish particularly in adverse market conditions. During any economic cycle, there will be times when one style delivers better performance than the other. Recognising a high-quality value stock, as opposed to one that is simply cheap, requires extensive research and a good understanding of the prevailing environment. They may be identified by having a low price compared with the value of their assets, and may be cheap simply because their sector is unfashionable rather than as a result of any economic disadvantage.
Investment style can vary according to the size of the company that the fund manager invests in. Companies are measured by market capitalisation – the number of shares of a company multiplied by their current price. There are no hard and fast rules but a good rule of thumb is that small-cap companies have a market capitalisation of between $300 million and $2 billion, mid-cap ones between $2 billion and $10 billion, and large-cap companies more than $10 billion.
The shares of companies of different sizes may perform differently depending on economic conditions. For example, small-cap shares tend to be more risky but offer the possibility of more rapid growth, while large-cap companies are more likely to pay regular dividends.