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 holdings based analysis. This process characterizes each security in the portfolio according to various factors, then uses this information to determine the overall style of the portfolio. Characterizations can include industry weight, valuation, growth, volatility and other factors.  If 80% of the stocks in a portfolio have small cap value characteristics, for example, it would be relatively safe to classify the portfolio as Small Cap Value.

Advantages of this process include characterization of each position in the portfolio, comparisons among individual positions, and a current (rather than backward-looking) analysis.

Disadvantages are that it can be hard to get accurate information regarding current holdings, is very data intensive, does not reflect the approach many managers use in selecting securities and requires subjective classifications of each stock.

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

See also:

Market Timing by Mutual Funds

Identifying Investment Style Through Returns Based Analysis

Selecting Equity Investment Managers

Tactical Investment Style Funds

The Top Down Approach to Security Selection