A question of style

Q – There are several mutual fund management styles – value, growth, etc. At what times in the economic and stock market cycles do the various styles perform best? Has anything in depth been written  on this subject? There is the odd article but I haven’t found anything substantive. – H..V.H.

A – There are indeed several types of investing styles. On the equity side, value and growth are the two most common. Value investing basically amounts to choosing securities that are well-priced on the basis of traditional measures such as price/earnings ratio, price/book value ratio, etc. Essentially, a value investor is a bargain-hunter, looking to buy $1 for 50 cents. A growth investor, by contrast, is less concerned about the current price of a security and more interested in the growth potential of a company in terms of revenue and profits. The idea is that the faster a company grows, the faster the share price will rise.

Other equity investing styles include sector rotation, momentum, and indexing. The latter is also called “passive” investing because it simply involves tracking the performance of a specific market index.

Growth, momentum, sector rotation anindexing all seem to work best in bull markets — the stronger the better. The value style generally does better when markets are flat or declining. That’s because there is inherently less risk in the value style because the investor who uses it properly should not overpay for a security. A different set of styles is used for fixed income securities.

Generally, I don’t recommend trying to switch styles to suit current conditions. That’s very difficult. A better idea is to ensure that at least the two main styles, value and growth, are always represented in your portfolio.

There is a chapter in investment styles in Gordon Pape’s 2002 Buyer’s Guide to Mutual Funds as well as in Secrets of Successful Investing, a new book which I have co-authored with Prof. Eric Kirzner of the University of Toronto. – G.P.