Financial Education

Just because a manager claims to be a value or growth manager doesn’t necessarily mean that they are. And even when a manager generally follows a given style, there may be certain stocks in the portfolio that aren’t representative of that style. This can pose problems for investors who are seeking exposure to a certain style.

One way to identify whether a manager is following a certain style is to use returns based analysis. Essentially, this process regresses the managers returns against those of various style benchmarks to see how much of the manager’s performance can be explained by the performance of each style benchmark.

Advantages of Returns-based analysis include providing an overall portfolio characterization, facilitating manager comparisons, aggregating the various effects of the investment process, minimal reliance on a specific model, providing a clear theoretical basis for portfolio characterization, minimal information requirements, quick execution and cost effectiveness.

Disadvantages are that it may not effectively characterize current style (it is backward-looking) and errors in specifying the benchmarks could lead to incorrect conclusions.

For more information, see all articles on: Asset Allocation, FInancial Planning, Investing in Stocks, Investment Returns, Portfolio Management, Valuation

See also:

Market Timing by Mutual Funds

Identifying Investment Style Through Holdings Based Analysis

Selecting Equity Investment Managers

Tactical Investment Style Funds

Types of Benchmarks