A question of style
Each manager always develops its own style at which it excels. Some adopt the value style, while others favour the growth style. To optimize the risk/return ratio, the objective is to combine different styles which are complementary to maximize diversification, and consequently the return per unit of risk. This exercise must, however, be well structured. It is not enough to invest in all the styles to obtain a superior return.
It is the right amount of the different styles, in keeping with the client’s objectives, that will optimize a portfolio according to the client’s profile.
Description of each of the styles
Here is a brief description of each of the styles commonly used by portfolio managers:
Value: The manager looks for undervalued stocks. Their price must be lower than the manager’s target price. Although it benefits in rising markets, the value style produces better results when markets are falling. It is usually less volatile, with low security turnover.
Growth: This style emphasizes current and future company earnings. The price paid for a stock is less important: the focus is on growth potential. This style is usually more volatile.
Income: The manager looks for high-dividend paying stocks. This is a low-volatility style that benefits from solid, well-established companies and relies on dividends to generate an attractive and steady return.
Growth at a reasonable price: The manager looks for stocks that have high potential but that are selling at a reasonable price. This is a hybrid style that combines value and growth.
Momentum: The manager seeks big short-term gains. Characterized by high turnover, this style invests in stocks that are in strong uptrends, without regard for the price. It performs well in times of euphoria at the end of bull markets.
Fundamental value: The manager looks for shares that are extremely undervalued by the market but that are issued by solid companies (e.g. Microsoft or Apple after the tech crash of 2001).
Contrarian value: The manager looks to buy stocks that nobody wants, to take advantage of their potential rebound.