Fund managers can choose between different styles of investing, for instance between shares defined as "growth" or "value", or classified according to company size. Each style displays different characteristics and performs best in a particular economic climate. Typically, growth stocks tend to deliver good 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. Successful growth shares with a larger capitalisation may also post strong revenue gains achieved through corporate expansion or pricing power. Growth shares are often 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 these companies’ products and services is expected to grow rapidly.
Value shares are stocks that are considered to be underpriced by the market and therefore represent an attractive investment opportunity. These are often shares of companies that, during phases of strong growth in the market, draw only little interest and trade at a discount relative to their historical valuations or to other shares. Frequently these securities are expected to perform better than the market as a whole in unfavourable market conditions. During any economic cycle, there will be periods when one style delivers better performance than the other. Recognising a high-quality value share requires extensive research and a solid understanding of the prevailing environment. For example, such shares can be identified if their price is low compared with the value of the company's assets, and this is not necessarily due to any economic disadvantage, but simply because they operate in an unfashionable sector.
Investment style can also be categorised according to the size of the company that the fund manager invests in. Companies are measured by market capitalisation – the number of the company's shares outstanding 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 USD 300 million and USD 2 billion, mid-caps between USD 2 billion and USD 10 billion, and large-cap companies have a capitalisation of more than USD 10 billion.
The shares of companies of different sizes may perform differently depending on economic conditions. For example, small-cap shares tend to be riskier but offer the possibility of more rapid growth, while large-cap companies are more likely to pay regular dividends.