What is ‘Investing Style’
Investing style is an overarching strategy or theory used by an investor to set asset allocation and choose individual securities for investment.
BREAKING DOWN ‘Investing Style’
Investing styles for individual investors are typically built from their risk tolerance which can be generally classified as either conservative, moderate or aggressive. Risk is usually a primary concern for individual investors when determining an investing style and making investment decisions. Risk is also usually a key aspect of disclosure for investors when analyzing managed funds for investment.
Modern portfolio theory suggests that investors should be cautious in overdiversifying their investments in order to achieve optimal risk and return. However with risk as a primary consideration, investors still have a multitude of investments for building a personal portfolio of individual securities or managed funds. In the investment universe investors will find both securities and funds reporting characteristics that fit with an investor’s investing style.
When investing in individual securities investors often look to stocks, bonds and commodities. Each have different risk levels and investment characteristics. Conservative investors may seek out individual securities for income. Many stable, large-cap stocks pay dividends which provide for conservative to moderate risk with steady income. Bonds can also be top investments for income investors with steady payouts from coupon payments.
Within each asset class investors will also find sub-asset classes that can guide their investing style. With stocks sub-asset classes may include growth or value. With bonds investors may choose to invest higher on the risk spectrum with high yield bonds or more conservatively with high quality bonds.
Managed Accounts and Funds
Financial service providers and investment managers across the industry provide both managed accounts and managed funds that can support style or thematic investing.
Robo advisors, wrap accounts and separately managed accounts are all options for investors seeking support in managing to a certain investing style. Robo advisors and wrap accounts often base style investing on an investor’s risk profile with active management also offering customized investing style options. Motif provides one example of a robo advisor for investors seeking to build a customized portfolio based on personal preferences and themes. The service supports thematic investing and also socially responsible investing.
Generally investing in managed funds can be one of the best ways to invest for style while also receiving the benefits of professional diversification. Most mutual funds and exchange-traded funds (ETFs) will employ a consistent investment style. For 1940 Act funds a manager’s investment style must be clearly articulated and disclosed in the fund’s prospectus which is filed with its registration.
In the managed fund investment industry investors will find all types of investment style options that generally fall into risk tolerance categories.
More conservative investors will often look to fixed income products such as money market funds, loan funds and bond funds. These funds are also good investments for income investors as they can pay steady distributions. Investing styles in this conservative group can vary by short, intermediate and long-term durations as well as credit quality.
Moderate risk investors are often drawn to large-cap, blue chip stocks and value investing. Large-cap, blue chip stocks offer the advantage of mature businesses and regular dividends. Value investments are identified as underperforming intrinsic value and can often offer dividends with long term capital appreciation, serving well as long term holdings.
Aggressive investors will look to some of the higher risk investment styles in the market such as growth funds, aggressive growth funds, capital opportunity funds and alternative hedge fund investment styles that have broader flexibility to utilize leverage and derivatives. International equities such as funds focused on the emerging markets, BRIC countries or Asia ex-Japan can also be attractive investment styles for more aggressive investors.
Passive versus Active
Among all risk categories investors will also find passive versus active funds. Some investors may choose a passive investing style that offers exposure to various segments of the market often with lowers costs and lower risk.
Each investor will have their own investing style and way of managing it among their investments. Do-it-yourself investors will take a more independent approach while investors using full service financial advisory platforms can rely more heavily on professional advice to help mold their investing style.
Regardless of the type of investing style an investor follows, due diligence is an important aspect for ensuring that an investment meets an investor’s style and also for maintaining investing style. Choosing funds with clearly followed investment style objectives can help investors manage a targeted portfolio. Working with a financial advisor or investment service that deploys regular rebalancing can also help investors to avoid style drift and ensure their investments are maintained according to their investing style preferences.