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What’s New With Investment Styles?
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Past Performance as a Determinant of Return
Predictive Ability of Past Performance 505 44% 50% 56% Source: Morningstar
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Contribution to Return Variation
The Importance of Asset Allocation in Explaining Total Portfolio Returns Contribution to Return Variation Security Selection 4.6% Market Timing 1.8% Other 2.1% Asset Allocation 91.5% Source: Brinson, Singer, and Beebower (1991)
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Contribution to Return Variation
The Importance of Investment Style in Explaining Individual Manager Returns Contribution to Return Variation Active Management 10% Investment Style 90% Source: Sharpe (1992)
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What is Investment Style?
Large Capitalization Large Cap Value Large Cap Growth Value Growth Small Cap Value Small Cap Growth Small Capitalization
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Investment Style as a Determinant of Return
Differences in Style Returns for U.S. Equities 20 15 Growth Outperforms Value Outperforms 10 5 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 20 Large Cap Outperforms Small Cap Outperforms 15 10 5 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Source: SEI Investments Management Corporation
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Style Distribution of Equity Manager Universe
Large Cap Value Large Cap Growth Small Cap Value Small Cap Growth
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Performance Attribution Using Style Analysis
Effective Mix Performance Attribution Stock Selection Style Allocation Small Cap Growth 8 Large Cap Growth Small Cap Value 4 Percent Allocation Percent Return Large Cap Value -4 -8 Time Time
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Investment Style as a Determinant of Return
14 12 10 8 6 4 2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Deep Value Core Value
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Manager Sub-Style Diversification Reduces Tracking Error
Small Cap Growth Manager Tracking Error Mazama 13.9 Roberston Stephens 11.0 Wall Street Associates 9.5 Nicholas Applegate 7.8 Sawgrass 13.1 Combination 5.8 Average Small Cap Growth Fund 9.1
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Style Volatility is Increasing
Best Performing vs. Worst Performing U.S. Equity Style 35 30 25 20 Return Difference, Rolling 3 Month 15 10 5 1995 1996 1997 1998 1999
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Sub-Style Volatility is Increasing
5 Year Tracking Error Range of Small Cap Growth Funds 30 25 20 15 10 5 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
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Returns to Technology are Driving Style Volatility
1000 800 600 Cumulative Wealth Advantage vs S&P 500 400 200 1 2 3 4 5 6 7 -200 Years into Bull Market S&P Technology ( )
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But We Have Been There Before
1000 800 600 Cumulative Wealth Advantage vs S&P 500 400 200 1 2 3 4 5 6 7 -200 Years into Bull Market S&P Technology ( ) S&P Tobacco ( )
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Investment Styles Go In and Out of Favor
LCG Outperforms by 60% 30 LCG Outperforms by 48% 25 LCV Outperforms by 55% LCV Outperforms by 49% 20 15 10 5 1980 1985 1990 1995 1999 Large Cap Value Outperforms Large Cap Growth Outperforms Source: Russell
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Wide Divergences Exist Between the Least and Most Expensive Stocks in the Russell 1000
43 104.3 17.1 1.2 Price/Earnings Price/Book Cheapest Quartile Richest Quartile Source: Wilshire
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Value Manager Drift in 1999 Technology Finance Price / Price /
Weighting Weighting Earnings Book Top Quartile Bottom Quartile Russell 1000 Value Index Source: Morningstar
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Are These Value Stocks? Price/ Price/ Earnings Book
MCI Worldcom Motorola Sprint Micron Technology
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Conclusions Returns to technology are creating wide divergences in valuation and index returns Sub-style variability is increasing, but can be managed with multiple manager portfolio construction It is much harder to analyze sub-styles than it is to analyze styles
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