What to know about investment styles and factors

INSTEAD of investing haphazardly in whatever tickles their fancy, professional fund managers invest according to a carefully thought-out process or strategy that aims to beat a predetermined benchmark over the long term.

- MARTIN HESSE

Before they look at individual shares (for the purpose of this article I'll stick to equities as an asset class), they are likely to consider the broader, so-called “macroeconomic” environment in which the market operates, although some so-called “bottom-up” managers pay little attention to macroeconomic influences.

At share-picking level, there is a range of well-tested investment strategies or styles. Once a manager has established the criteria for determining not only which shares to buy but when to buy and when to sell them, the manager needs to stick to that process through good times and bad. This applies to any investor: if you become unstuck and start letting your emotions (fear and greed, in particular) rule your decisions, you will enter the investor’s nightmare of buying high and selling low.

The better-known investment styles are:

Value: the manager buys shares that are undervalued (trading at a low price) and that he or she believes will return to a price that better represents the company’s worth, or “fair value”. It may be likened to eyeing an antique vase in a junk shop that you believe is worth much more than the price the shop owner has assigned to it.

Value may be measured by looking at a share’s price/earnings (PE) ratio — the price of the share in relation to the profits the company has made or is expected to make.