Equity Style
Equity Style
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Value
investor looks for low price
ratios. But should understand what the reasons for the price being low are.
Types of value investor:
- High dividend yield
- Low price ratio (numerator of P/E ratio)
- Contrarian
Growth
investor:
Pay attention to the
denominator of the P/E ratio
- Consistent growth
- Momentum: will sell stock when the momentum
breaks
Better
return during economic contraction
Market
Oriented Investing
- Market Oriented with growth tilt
- Market Oriented with value tilt
- Growth at a Reasonable Price (GARP)
- Style Rotation: adapt what they think will be
popular in the future
Market
cap-based investing
Large Cap (believe
can add value to the less risky securities)
Mid Cap (not that
risky and less covered)
Small Cap (believe will
grow faster)
Micro Cap – smallest
of small cap
Return-based
Style Analysis
Regress the return against benchmarks:
- Benchmarks has to be complete and detail
enough, no overlap or underlap
- 1-R^2 is the security selection (style fit)
- Error term is the selection
return
Multi-Period
Return-based Style analysis
Holding-based
Style Analysis
Low P/E, P/B, high
dividend yield: value
High P/E, P/B, low
dividend yield: growth
Average: market
oriented
Expected earnings
per share growth rate: high: growth, low: value
Earning volatility:
high: value
Industry: IT:
growth, finance: value
Holding-based
Style Analysis can detect drifts earlier
Equity
Style Indices
- Assign to either growth, value
- Assign to either growth, value, neutral
- Partially assigned to growth and the rest to
value
Buffering: stock is
not moved to other categories immediately when the characteristic changes
Morningstar
Equity Style Box: Value/Core/Growth vs Large/Middle/Small-cap
Style
Drift: Manager strays
away from the original stated style
Social
Responsible Investing (SRI)
- Positive screening (search for certain types
of companies)
- Negative screening (avoid certain companies)
SRI can affect
investing style, e.g. shift toward growth stock