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Understanding Investment Styles

By Dr. David Edward Marcinko; MBA, CMP™

A mutual or hedge fund manager’s investment style is defined by the means or strategies used to accomplish the fund’s stated objective. Most managers have a strategy they believe to be the key to maximizing risk-adjusted investment returns. For example, two equity managers may seek growth of capital or capital appreciation over the long term. The strategies they use to achieve that goal can be vastly different, however, as evidenced by their choice of securities.

Style Characteristics

Astute physician-investors are aware that there are four, main manager style characteristics: value vs. growth, top-down vs. bottom-up—which can be refined further by additional approaches. Certain statistics and information reveal a manager’s style. An investor may prefer one style or one combination over another

Approaches Vary

Style approaches can be used in tactical asset allocation. Research has shown that one style tends to outperform the other during certain periods. If investors believe they can identify when one style will outperform the other, they could overweight the favored approach. More and more fund complexes are now offering funds in each style; especially for large healthcare entities and other institutions.

Value vs. Growth

Manager autonomy and style is an important consideration.

1. Value managers focus on a company’s assets or net worth and attempt to place a value on such assets: if their valuation is greater than the market’s valuation, the security is a candidate for ownership. Benjamin Graham, the father of value investing, believed this approach to selecting securities would eventually be recognized by the market, rewarding patient, long-term investors. In today’s service economy, value managers also attempt to value the intangible assets of a company, such as franchise value or human capital. Value managers tend to be contrarians—they buy out-of-favor stocks or stocks not widely followed or recommended by analysts. Value managers also look at the breakup value of a company (what the individual parts could be sold for). They buy cheap stocks: stocks with low P/E ratios or low price-to-book value relative to the market, and stocks of established companies that pay dividends.
2. Growth managers look at corporate earnings and focus on improving or accelerating earnings. They look at the trend of an industry or market sector (for example, environmental technology) to see if there is future sales-growth potential. They may lean toward companies that are dominant in the industry or have a product or service that will dramatically improve their market share. Growth managers typically own stocks with higher P/E ratios than the market average; these stocks may not be out of favor, but they may have been overlooked by market analysts. Growth stocks usually are not high-income-paying stocks.

Assessment

Prior to the recent financial meltdown, growth and momentum investing was the norm. Now it is value investing. What about the future for the physician-investor?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

Filed under: Financial Planning, Investing, Portfolio Management | Tagged: growth investing, value investing | 4 Comments »