Everyone has experienced the cyclicality of growth and value managers. But why is it that not all value managers, for example, move in lockstep with one another? Through years of research we have identified another factor, a third dimension to style that is so powerful, it deserves to be a style classification in its own right.
This factor is the stability of a stock’s past returns relative to other stocks and is the basis for our Stable and Variable style groups. Both of these groups offer a sharp distinction in performance. Categorizing stocks on the basis of the stability of returns represents a powerful extension of the conventional value and growth framework, enhancing the ability of our indices to distinguish growth from value stocks.
Failure to consider this factor can lead to underperformance. We have found that most equity managers are either Stable Value or Variable Growth, thereby leaving two significant style gaps – Stable Growth and Variable Value – that can be filled with our indices to improve the diversification of overall equity portfolios.
Four Improved Style Groups – Pure and Powerful
Most of today’s leading style indices are indeed watered down, holding too many stocks that don’t capture the true characteristics of the style they are meant to represent. And when indices become diluted, they fail to demonstrate the return pattern of their style as they move through the business cycle. OakBrook’s Style Indices instead only include those stocks in each group that demonstrate the strongest characteristics. The benefit is that each of our four style indices has pure style properties.
Whether used as complements or enhancements to other styles, these indices are powerful tools. Stable Growth and Variable Value styles are underrepresented in most institutional portfolios and the indices can be used to gain exposure to these styles. Or, Stable Growth and Stable Value can be combined to form a Stable Equity Index, which offers very attractive defensive properties.