Meaning, Key Factors, and Types

Investment style is the method and philosophy that an investor or money manager follows. It informs the decisions they make in selecting investments and managing a portfolio.

Investment styles are often characterized by risk tolerance and the type of stocks, such as large-cap or mid-cap, that the investor has a preference for. Investment style can also include a preference for value or growth stocks. Investors should always make sure a fund’s investment style lines up with their own before buying shares.

What Is Investment Style?

Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio. Investment style is based on several factors, such as risk tolerance and a preference for growth versus value.

The investment style of a mutual fund helps set expectations for risk and performance potential, so investors can align it with their own financial goals. Styles range from conservative to aggressive, appealing to different risk profiles, and tools like the style box help investors understand a fund’s characteristics and how it manages its portfolio.

Types of Investment Styles Explained

Investment styles vary widely, with managers offering many fund strategies for different portfolio allocations. These styles are often categorized by risk. Risk and the risk allocation fit for investors is typically a primary differentiator that helps mutual fund companies market to investors. Investors will typically begin their investing style choices by first considering their risk tolerance, which can be either conservative, moderate or aggressive. Among these categories, investment managers can offer both active and passive investment strategies that broaden the investment options even further for investors.

In addition to risk tolerance, investment style can describe the type of investments that a portfolio has. For instance, investment style may be dictated by market capitalization (large-cap), mid-cap, small-cap) or whether a stock is growth vs. value. For investors choosing mutual funds, the investment style is key. A style box visually shows a fund’s characteristics. Morningstar, Inc. popularized the style box by incorporating it into its mutual fund ratings, which assign one to five stars. Therefore, many investors use the style box to evaluate funds. It also has other practical uses.
Read on to find out how style boxes can be used to categorize mutual funds and individual securities and to help you understand money management and the asset allocation strategy of your portfolio.

Comparing Growth vs. Value Investment Strategies

Investment style is often distinguished by growth versus value. Growth stocks may outperform the market over time due to their future potential. Value stocks trade below their real worth and can provide superior returns. The decision to invest in growth vs. value stocks is ultimately left to an individual investor’s preference, as well as their personal risk tolerance, investment goals, and time horizon. It should be noted that over shorter periods, the performance of either growth or value will also depend in large part upon the point in the cycle that the market happens to be in.

Customizing Investment Styles by Risk Tolerance

Conservative

Conservative funds typically focus on income and fixed-income investments like money market, loan, and bond funds. These funds are good for income as many pay interest distributions or reinvest for growth.

In fixed income, managers offer funds based on duration and credit quality. Typically conservative, these investments can also be aggressive if they have higher yields and lower credit quality, appealing to those with conservative to moderate risk tolerance.

Moderate

Moderate-risk investors often choose funds with large-cap, blue-chip securities or a value style. Large-cap stocks appeal to income investors because they are mature and have steady dividends. Value funds can also offer income. Value stocks usually have moderate risk and are priced below intrinsic value, making them a solid core holding for many investors.

Aggressive

Growth funds, aggressive growth, and capital opportunity funds, as well as hedge funds using leverage and derivatives, appeal to aggressive investors. These funds are typically actively managed funds that seek to outperform market benchmarks. Aggressive funds may also encompass broad investment universes for greater return potential. These funds might include global or international securities focused on high-growth areas like emerging markets, BRIC countries, or Asia excluding Japan.

Investment Style Disclosures and Regulations

Funds managed by all types of investment managers in the investment industry include investment documents that provide in-depth details on a fund’s investment style. Registered funds are more transparent, as directed by the Securities Act of 1933 and the Investment Company Act of 1940. Hedge funds and other alternative funds will also provide investment style disclosures in various forms for their investors.

In the registered universe, funds must file a prospectus and statement of additional information with their registration. A fund’s prospectus is typically the primary source of information for investors seeking to understand a fund’s investment style. Along with investment style, the prospectus will also disclose details about the levels of risk an investor can expect with the fund and the types of investors who would find the fund to be the best fit.

The Bottom Line

Investment style reflects the approach used to select investments and helps manage risk and set expectations for a portfolio. It depends on an investor’s risk tolerance and preferences, such as choosing between conservative, moderate, or aggressive strategies or favoring growth or value.

Tools like mutual fund style boxes make these differences easier to compare, and reviewing a fund’s prospectus helps investors ensure the style and risks fit their goals.