Question

Discuss style portfolios. How is their performance measured?

Answer 1

Style refers to the investment approach or objective that a fund manager uses. Style guides how a fund manager selects securities for the fund's portfolio. While there are a variety of styles, there are nine basic investing styles for both equity and fixed-income funds. For stock funds, company size and value/growth characteristics determine the style. For bonds, style is defined by maturities and credit quality.

The style of equity investments is determined by size and value/growth characteristics. The specific size parameters for stocks are large-, mid- and small-size companies, which are determined by market capitalization. Value, growth and neutral are the three basic value/growth categories for stocks.

The style of bond investments is determined by term and credit. Bond maturities are categorized as short term, intermediate term and long term. Credit quality is determined by a bond's status as a government or agency issue and credit ratings for corporates and municipals of 'AAA' to 'AA' (high), 'A' to 'BBB' (medium) and 'BB' to 'C' (low).

Variations and combinations of these basic categories, as well as consideration of special industries, industry sectors and geographic location, create investment styles for both stock and bond funds beyond the basic nine categories for each.

Investment Style Disclosure

Funds managed by all types of investment managers in the investment industry include investment documents that provide in-depth details on a fund’s investment style. Registered funds are more transparent, as directed by the Securities Act of 1933 and the Investment Company Act of 1940. Hedge funds and other alternative funds will also provide investment style disclosures in various forms for their investors.

In the registered universe, funds must file a prospectus and statement of additional information with their registration. A fund’s prospectus is typically the primary source of information for investors seeking to understand a fund’s investment style. Along with investment style, the prospectus will also disclose details about the levels of risk an investor can expect with the fund and the types of investors who would find the fund to be the best fit.

Investment Prospectus

A prospectus is a formal legal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public.

A prospectus includes the name of the company issuing the stock or the mutual fund manager, the amount and type of securities being sold and, for stock offerings, the number of available shares. The prospectus also details whether an offering is public or private, how much the underwriters are earning per sale and names of the company’s principals. A brief summary of the company’s financial information, whether the SEC approved the prospectus and other pertinent information is included as well.