Style Analysis

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21 Aug, 2024

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Style Analysis refers to the investing behavior that an individual adopts in the market, which defines their philosophy and psychology regarding money management, finance, and investment decisions. The individual can be anyone from an individual investor to a stock market trader or a fund manager.

Initially, every single person has an investment style. The style analysis helps in identifying the behavior according to which an individual can choose the fund manager, or a broker or financial advisor can give advice to people. It is always best to find a fund manager, advisor, or financial help that matches an individual’s investing style.

What Is Style Analysis?

Style analysis is the determination of an investor or fund manager’s investing behavior and psychology to ensure they share the same goals and vision.
There are typically three types of investing styles: active investing, growth investing, and value investing.
By determining the style analysis, investors, advisors, and money managers can be measured, judged, and hired for financial services and management.
People typically prefer advisors and fund managers who share the same vision and investing style so that there are no conflicts.

Style Analysis In Finance Explained

Style analysis is the determination of an investor or money manager’s financial behavior and investing style. It is a very crucial aspect because every single market participant has their philosophy and psychology around money management and finance. When two different ideologies conflict, it is challenging to manage funds. Although the investing style can vary numerously with every change there are mainly three types of investing style.

The first is active investing which refers to a strategy where investors or money managers are readily looking for new stocks and select investments based on their independent worth to beat the market. In such a style of investing, the individual is always active in the market, and if the investments they are holding do not give the expected return, they sell them.

The second is growth investing, which is more about increasing the capital; an investor with this investing style is majorly seen investing in small and new businesses with an above-average rate of return compared to the other industry players or the entire market. This style has a large time frame with money managers seeking stocks with huge potential for future growth.

Lastly, is value investing, one of the most prominent styles of wise investing techniques. It basically means looking for cheap stocks that most people don't recognize and appreciate by the market. Such an investing style requires detailed knowledge of company fundamentals. In such an investing style, investors have high expectations for the stocks to rise as more people appreciate their true intrinsic value.

Defining guidelines for style analysis is pretty straightforward; most of the time, the money managers themselves get information about their actions and way of thinking in the market. However, an investor should always try to cross-check with their track record and actions taken in the past few years. It may look like just a style, but a lot of decision-making, asset selection, and future return depends on it.

Examples

Below are two examples of style analysis -

Example #1

Suppose John is an amateur investor; he has been active in the market for only nine months, but he ardently believes in remaining patient in the market and has adopted the philosophy of growth investing. He actively seeks new and small businesses with a promising future return and a high potential for growth over time.

For some time, John has been looking for a money manager who can take care of his portfolio. He comes across Jason. Upon looking at Jason’s track record over the past few years, John clearly understands that Jason is more interested in active trading than growth investing. This simply means that Jason is not the right choice for John, as they will always have conflicting thoughts about investing and money management.

This is a simple example of style analysis. However, it is possible that over time, due to certain factors, one may accept and approve of a different investing style.

Example #2

In the second hypothetical example, suppose Janice is a new investor; she is not looking to make an instant profit but has a goal of creating long-term wealth. She comes across a mutual fund that she likes. On doing a proper analysis, she finds out about the fund manager who shares the same thought process and financial objectives of long-term wealth.

It is one of the few traits that Janice was looking for in a money manager. By performing the style analysis, Janice goes through the record of the fund manager and is impressed with his actions and performance. Janice is convinced that this is the mutual fund she should invest in and finally decides to invest in it.

It is again a hypothetical scenario elaborating on how style analysis helps investors make better-informed decisions.

Importance

The importance of style analysis is -

It assists in determining the investing style and behavior of investors and money managers in the market.
Style analysis informs on how exactly an investor thinks, acts, and believes in the market.
People looking for assistance and management can measure the other person’s investing behavior through style analysis.
With modern tools and innovation, style analysis helps in deconstructing portfolios based on their return, including hedge funds and the styles of investing of a portfolio manager.
With the help of style analysis, people can choose investment strategies for asset allocation.

Frequently Asked Questions (FAQs)

1. How to use style analysis to select a money manager?

The most simple way to select a money manager based on style analysis is to check their past track record. Most managers directly reveal their strategy and actions, but it is always better to look at their performance over the years just to ensure they act on their words and practice what they preach.

2. What is return-based style analysis?

It is a top-down method of deducing the investment strategy using statistical techniques and a series of variables and factors. The investing style is majorly judged on the return and its exposure to different asset classes. It is mainly used to gauge hedge funds and mutual funds, including the fund manager’s style.

3. How to select asset allocation strategies using style analysis?

When an investor is either selecting an asset allocation strategy or is making amends to its portfolio. It is directly proportional to their style analysis. For instance, if an investor has a growth investing style, then most of the assets in their portfolio will be towards small and new businesses with high potential.