Investment professionals who oversee assets on behalf of clients are paid to produce a certain type of returns, or profits. Similarly, investors select money managers to oversee assets with an expectation in mind for the types of profits that will be realized and the amount of risk involved with the exposure. Portfolio managers subsequently may pursue style investing, where a specific strategy is outlined in fund's origination documents and followed throughout the life of that investment vehicle. When successful, style investing will lead to the types of returns that are expected.
Style investing is just as much about the investor as it is the money management professional. Institutional investors, such as pension funds, often outline an asset allocation that describes the percentage of a total investment portfolio that can be dedicated to which asset classes, or categories of investment. Within the equity asset class, that investor might be permitted to invest across different investment strategies based on risk tolerance and reward expectations. This is a form of style investing that could grant the investor exposure to categories such as the emerging markets, where risks and rewards may be similarly high.
Growth investing is an investment style used by money managers. In this approach, companies that have the potential for high growth are identified. Investment opportunities could be uncovered across different asset classes, including companies with a small market capitalization, which is a measure of the size of a company. Initial public offerings, which are companies that are only just entering the public markets for trading, represent another potential growth category. A common theme in style investing of this sort is that it is based on the presumption that, as a company's profits grow, so too will the price of the stock.
Investment professionals might also pursue a value strategy for stocks. In this style, the investor seeks to uncover opportunities where the market value, which is where investors are valuing the security, has not yet reached the intrinsic value of a stock. Risks include the likelihood that a stock's intrinsic, or true, value will be identified correctly and also that other investors will eventually agree with that determination. To qualify as a value investment, a stock must be trading below what is thought to be the intrinsic value of that security by a certain percentage. In the event that a portfolio manager deviates from an original strategy, an investor such as a pension fund may be compelled to withdraw assets from the fund and reinvest elsewhere.
