复旦大学：《投资学讲义》（英文版） Chapter 10 Investment Styles

Investment Styles Fan longzhen

Investment Styles Fan Longzhen

Introduction Overview of investment styles Empirical evidence on returns of small capitalization firms and value stocks How to identify investment styles of a mutual fund Characteristic-based style analysis Return-based style analysis Style benchmarks Why value stock outperform growth stocks Earning and price momentum

Introduction • Overview of investment styles; • Empirical evidence on returns of small capitalization firms and value stocks; • How to identify investment styles of a mutual fund – Characteristic-based style analysis – Return-based style analysis • Style benchmarks • Why value stock outperform growth stocks; • Earning and price momentum

Ty rpes of investment styles Growth investing Primarily concerned with the earning component of the P/E ratio Look for high growth rate Value(non-growth)investing Primarily concerned with the price component of the P/E ratio Look for cheap stocks Small cap investing (as opposed to large cap) Looking for neglected stocks Undervalued relative to large cap equities

Types of investment styles • Growth investing – Primarily concerned with the earning component of the P/E ratio – Look for high growth rate • Value (non-growth) investing – Primarily concerned with the price component of the P/E ratio – Look for cheap stocks • Small cap investing (as opposed to large cap) – Looking for neglected stocks – Undervalued relative to large cap equities

Investment styles · Value: low price/book; low P/E; utilities indust · Growth: high eps growth high profitability; health technology Small capitalization

Investment styles • Value: – low price/book; low P/E; utilities industry • Growth: high EPS Growth – high profitability; health & technology • Small capitalization

Why style analysis? Returns of stocks in one category(e.g. growth) behave quite differently from stocks in another category(e.g value Style anal ysis facilities Monitoring style characteristics Diversification and risk control Performance valuation In september 2001. a total of 3271 domestic equity managers participated in the survey 962 identify themselves as value managers 1124 identify themselves as growth managers

Why style analysis? • Returns of stocks in one category (e.g. growth) behave quite differently from stocks in another category (e.g. value) • Style analysis facilities – Monitoring style characteristics; – Diversification and risk control; – Performance valuation • In September 2001, a total of 3271 domestic equity managers participated in the survey – 962 identify themselves as value managers; – 1124 identify themselves as growth managers

Returns of small capitalization stocks Fama and french(1992) Rank the stocks into ten deciles based on market capitalization every year Compute the average l-year holding period return after portfolio formation Found small stocks have higher returns than big stocks 963-1991) Fama and french do a secondary sort by beta within each size decile, and find that beta can not explain the returns

Returns of small capitalization stocks • Fama and French (1992) – Rank the stocks into ten deciles based on market capitalization every year; – Compute the average 1-year holding period return after portfolio formation. – Found small stocks have higher returns than big stocks (1963-1991) – Fama and French do a secondary sort by beta within each size decile, and find that beta can not explain the returns

Return of high/low book-to-market stocks Fama and french(1992, Journal of finance) Rank stocks into ten deciles based on book-to- market ratio every year, Compu oute the average 1-year holding period return after portfolio formation Value stocks have higher average returns than growth stocks

Return of high/low book-to-market stocks • Fama and French (1992, Journal of finance) – Rank stocks into ten deciles based on book-to￾market ratio every year; – Compute the average 1-year holding period return after portfolio formation; – Value stocks have higher average returns than growth stocks

How to identify investment style of a mutual fund Characteristic-based style analysis Examine the portfolio holdings of a fund Compute the average style characteristics Ⅴaue enc grow th lowest lowest medium medium lowest medium highest small medium highest highest

How to identify investment style of a mutual fund • Characteristic-based style analysis; – Examine the portfolio holdings of a fund; – Compute the average style characteristics. value blend growth large lowest lowest medium medium lowest medium highest small medium highest highest

Morningstar Fund analysis Market capitalization classification Step l rank all stocks based market capitalization Top 5% of the stocks as large cap Next 15% of the stocks are medium cap Remaining 80% of the stocks as small cap step 2: assign a score of 3 for large-cap stocks, 2 for mid- cap stocks, and I for small-cap stocks -step 3: calculate the weighted average of the market cap score across all stocks in the fund Step 4: classification · If market cap score1.5→ small cap fund ·If1.52.5→ large cap fund

Morningstar Fund Analysis • Market capitalization classification – Step 1: rank all stocks based market capitalization • Top 5% of the stocks as large cap; • Next 15% of the stocks are medium cap; • Remaining 80% of the stocks as small cap. ---step 2:assign a score of 3 for large-cap stocks, 2 for mid￾cap stocks, and 1 for small-cap stocks. ---step3: calculate the weighted average of the market cap score across all stocks in the fund. ---Step 4: classification • If market cap score2.5 large cap fund ⇒ ⇒ ⇒

Morningstar fund analysis Growth/value classification Step 1: estimate mediam P/E and p/b ratio of the stocks three market-cap groups; Step 2 compute the p/e and p/b score for each stock divide each stocks P/e and p/b by the median p/e and median p/B (respectively) of the stocks market-cap group Step 3 calculate the average p e and p/b score for each fund average p/E or p/b score is 1 Step 4 combined score=p/e score +P/B score Step s classification If combined score 2.253 growth fund ·If1.7< combined score<2.25→ blend fund · If combined score175→ value fund

Morningstar Fund Analysis • Growth/value classification – Step 1: estimate mediam P/E and P/B ratio of the stocks in three market-cap groups; – Step 2 compute the P/E and P/B score for each stock: divide each stock’s P/E and P/B by the median P/E and median P/B (respectively) of the stock’s market-cap group; – Step 3 calculate the average P/E and P/B score for each fund: average P/E or P/B score is 1. – Step 4 combined score=P/E score +P/B score – Step5 classification • If combined score>2.25 growth fund • If 1.75<combined score<2.25 blend fund • If combined score<1.75 value fund ⇒ ⇒ ⇒