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”!
In essence, what that means is the methodology that managers use when choosing the underlying investments in 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 doing better than the market average and companies within those areas with the most growth potential.
Generally, for Growth managers, how expensive the shares are is not THE major consideration when deciding on whether to invest in the company or not as they believe the shares will continue to grow in value even though they are more expensive than the general market.
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.
Therefore, how expensive the shares are will be a major consideration for a Value manager.
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 overall market.
So when your adviser talks about asset allocation, they are also taking into account diversification across the investment management styles as well.
You should have exposure to different styles of investment management in your portfolio as history tells us one investment style performs better at different times in the economic cycle than the other.
This helps to add another layer of risk mitigation and can help to smooth out your returns.
Once you start adding in the myriad of other investing styles and options available today such as factor-based, thematic, and quantitative investing it is clear to see that smart investing is not as easy as it sounds.
That’s why RSM is here to help do all the hard work for you. Contact your nearest RSM office today!
This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.
As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs, and objectives, and seek financial advice before implementing a strategy.
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