Many investors have felt the practical frustration of trying to differentiate between investment products with similar style descriptions, such as “Large Growth” funds. Equity portfolios labelled with the same style category often perform very differently. Is it really just explained by different “stock selection”? Or are there other important styles that are being overlooked?

The good news is that more detailed, style-oriented comparisons between portfolios are now possible. This opens up a world of new, deeper insights to help investors as well as fund managers understand the underlying differences of what is driving portfolios. Peer Insights™ from Style Research delivers comparative metrics based on intuitive, understandable style factors. Having this clearer, deeper picture leads to better decisions and confident portfolio communications.

Using selected graphics, we can see how Peer Insights directly addresses the common frustration felt by many investors by adding a detailed level of perspective within familiar peer universes. It extends the well-known and easy-to-understand portfolio analytics of Style Research to perform consistent fund-to-fund comparisons and assess important underlying differences.

Measuring Style with Style Tilts™ and Style Skylines™

Many investment professionals are already familiar with the concept behind the Style Tilt™. This intuitive holdings-based measure visually identifies a portfolio’s directional exposure to well-known institutional style factors – such as Book-to-Price, Earnings Growth, Momentum, or Market Beta – together with the significance or deliberateness of that exposure. The Portfolio Style Skyline™ arranges an industry-standard collection of Style Tilts across key style categories and sub-styles – including Value, Growth, Size, Risk, Quality, and ESG.


Discovering Differentiation Between Funds with Peer Insights™

The graphic below shows the Portfolio Style Skyline™ applied to Morningstar’s US Large Cap Growth Universe as of March 2016. The floating bars show the distribution of Style Tilts for over 370 Large Cap Growth mutual funds within this universe. The zero line represents the Russell 1000. As we would expect, we can see a decidedly purposeful shift towards Growth (green bars) together with a bias away from Value (blue bars).


While useful in understanding overall peer group biases, this approach can be extended by plotting individual equity fund products onto the peer group backdrop. In the graphic below, we have overlaid two different large cap growth mutual funds from the Morningstar Large Cap Growth Universe: the Lord Abbett Growth Leaders Fund and the Columbia Large Cap Growth Fund, as of March 2016.

SR_bluebarsLegend

We can see that relying upon traditional Value measures such as Dividend Yield, Earnings Yield, or Cash Flow Yield, there would be little room for differentiation between these two funds. But, since these are Growth-themed products, it makes sense to focus on selected Growth measures (green bars).

SR_GreenBars_wLegend

The Columbia Large Cap Growth Fund is in the lowest quartile for ROE and Income/Sales. So this product is not only tilted towards companies with lower profitability than the benchmark. It is also in the lowest quartile versus its direct competitors.

By comparison, the Lord Abbett Growth Leaders Fund has higher than typical exposures towards ROE and Income/Sales. Lord Abbett also has a strong positive exposure to companies with more positive analyst earnings estimate revisions (in the top 5% of the peer group). This latter Style Tilt combined with a significant bias to price momentum (black bars on previous graphic) indicates a clear Growth and Momentum bias for Lord Abbett’s product. The stock picking approach is clearly different between these funds, certainly at this time point.

The Impact of Style on the Performance of Funds

We might ask whether sub-styles matter within the same style category, such as Growth. Consider that for the 10 years ending April 2016, High ROE stocks (top 50% of the Russell 1000) outperformed the index by 16.8%, and High Estimate Revisions outperformed by 20.0%. Over the same period, stocks with High Profit Margin actually underperformed by 7.2%. (High Momentum stocks underperformed by 3.1% over the same period.) Interestingly, over the most recent 5-year period ending April 2016, stocks with High Estimate Revisions outperformed by 10.8%, while High ROE and High Profit Margin only very marginally outperformed. These sub-styles can indeed perform very differently and can make meaningful impacts on fund performance.

We can see that a more focused lens on style can reveal important differences between two investment funds which might initially appear broadly similar in style. These style differences can be important influences on managers’ fund performance against their direct competitors.

Leave a Reply