Investment styles

What is style investing?


In investment, there are no free lunches: to seek a return, you have to take a risk.

“Styles” are shared features of equities and bonds.

Examples of style could include “cheapness,” or those that have a healthy  financial situation or those that have tended to move less erratically than others.

You can think of these “styles” as each relating to a risk.

For a suitable portfolio, one consideration is that by following a style – that is, by accepting a certain risk – you are seeking to earn a return.

So let’s take a closer look at some examples of styles.


A basic style manual



Firms whose businesses are expanding rapidly – or which may do so in the future – are called “growth” companies. 

Such firms are often found in innovative industries and sub-sectors, such as digital technology specialists or those looking for scientific breakthroughs in healthcare.

Growth equities are typically expensive relative to the overall market. 

In other words, they trade on high valuations compared to their forecast profits (if indeed they have any) or their sales.

Investors buy in the hope that the shares will rise in anticipation of much higher sales and profits down the road.

If this growth does not live up to expectations – or the company’s business model fails – investors could face substantial losses.


Often seen as the opposite of growth, value is about buying cheap.

Specifically, investors seek to buy up equities or bonds that are lowly valued in comparison to others, or which are cheap in relation to a company’s assets or profits.

Sometimes, these securities are cheap because they have fallen out of favor with investors.

For example, In the late 1990s, investors flocked into internet-related companies, while selling shares in then-unfashionable “old industries” such as packaging and home builders.

Buyers of “value” hope that other investors will ultimately change their mind about the assets in question and that their prices will then rise.

(That’s indeed what happened after the internet bubble burst in 2000.) 

One risk here can be that the companies in question are cheap for good reason, i.e., that they face genuine threats, perhaps sometimes even bankruptcy.


A “quality” company is generally defined as one with a combination of resilient finances, stable profits and high profit margins.

High quality companies’ securities have often done better than others – and particularly low quality companies’ securities  at times of market turmoil.

As such, some investors tilt their portfolios toward quality at times of great uncertainty.

Conversely, quality may underperform the wider market – and especially low quality – during strong uptrends, when investors are in risk-seeking mode.


Momentum means buying strong performers of the last few months or years and avoiding the losers of the same period.

It is basically a bet that strength or weakness will continue, at least for the time being.

Momentum investors tend to be less interested in a company’s fundamentals, such as its profits or balance sheets.

They simply focus on the trend and try to ride it.

This creates the risk of buying overvalued shares that may then reverse suddenly, eating into any returns.

Another issue is that momentum requires frequent buying and then selling. The costs of this may also eat into returns.

Low volatility

Some securities tend to have a bumpier ride over time than others.

Those whose returns fluctuate more are said to be more volatile.

A low volatility strategy involves buying securities that have had a smoother ride in the past, while avoiding those with high volatility.

Particularly during a bear market – when the overall trend is downwards – low volatility strategies have often beaten the market.

The flipside of this is that low volatility can underperform when the wider market is in an uptrend or bull market.


Size matters in investments.

Securities in smaller, medium sized and large companies have often seen different fortunes at different times. 

Financial theory says that smaller companies are often riskier than larger companies overall. 

Often, smaller companies are more exposed to economic downturns. So, when times are hard they may underperform large companies.

Conversely, when times are good and markets are bouncing back, smaller companies can do well.

Another consideration is that smaller company securities are more illiquid, i.e., harder to buy and sell, as well as more volatile.


Style investing in a portfolio


If you hold a globally diversified portfolio of equities and bonds, the likelihood is that you already have exposure to all of the styles discussed above.

However, some investors deliberately skew their portfolios toward a particular style that they believe may do well in the near future or thereafter.

Not all styles can do well at the same time.

When growth is doing well, value is usually suffering, for example.

Seeing that a particular style is beginning to come back into fashion, an investor might decide to shift into that.

This may happen because of economic developments, which can influence style performance.

To tilt a portfolio toward a style, investors sometimes buy a collection of individual shares or bonds that fit within that style.

But another approach could be investing in an exchange traded fund or other tracking vehicle associated with a style.


Risks of style investing


As we’ve said, style investing is all about accepting a particular risk with the aim of being rewarded for taking that risk.

Naturally, though, this can backfire.

You might choose to follow a style that has done well for several years, just as it is about to stop doing well.

Or, you might choose an unfashionable style, believing it to be on the verge of a comeback that doesn’t happen.

Styles can underperform the wider market for several years at a time.

For this reason, it’s essential to do your homework about what typically drives styles and when.

For example, you should be aware that value equities may outperform when interest rates are going up but underperform when they are falling.


The bottom line


Even if you simply plan to hold a broad, global portfolio of equities and bonds, it is still important to understand styles.

Styles will continue to impact your returns even if you don’t actively tilt your portfolio towards certain ones.

Thorough research into when styles may do better and worse – and of the risks involved – is essential before committing.



Style investing is based on the principle that groups of shares and bonds have similar characteristics, which arise from a common risk.

Some of the styles include growth, value, quality, momentum and low volatility.

A globally diversified portfolio will likely include different styles naturally.

Investors often skew their portfolios towards a style they believe may do well.

Style investing is by nature about taking on certain risks and investors can experience significant losses.

Styles can experience long runs of underperformance.