What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability...
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![Page 1: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/1.jpg)
What’s New With Investment Styles?
![Page 2: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/2.jpg)
Past Performance as a Determinant of Return
Predictive Ability of Past Performance
Source: Morningstar
505
50%
1990-1994 1995-1999
56%
44%
1990-1994 1995-1999
![Page 3: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/3.jpg)
The Importance of Asset Allocationin Explaining Total Portfolio Returns
Contribution to Return Variation
Source: Brinson, Singer, and Beebower (1991)
Security Selection 4.6%Market Timing 1.8%
Other 2.1%
Asset Allocation91.5%
![Page 4: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/4.jpg)
The Importance of Investment Stylein Explaining Individual Manager Returns
Contribution to Return Variation
Source: Sharpe (1992)
Investment Style 90%
Active Management 10%
![Page 5: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/5.jpg)
What is Investment Style?
Large Capitalization
Small Capitalization
Value Growth
Large Cap Value Large Cap Growth
Small Cap Value Small Cap Growth
![Page 6: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/6.jpg)
Investment Style as a Determinant of Return
Growth Outperforms
Value Outperforms
Differences in Style Returns for U.S.
Equities
0
5
10
15
20
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Large Cap Outperforms
Small Cap Outperforms
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 990
5
10
15
20
Source: SEI Investments Management Corporation
![Page 7: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/7.jpg)
Style Distribution of Equity Manager Universe
Large Cap Value Large Cap Growth
Small Cap Value Small Cap Growth
![Page 8: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/8.jpg)
Performance Attribution UsingStyle Analysis
Effective Mix
Large Cap Value
Large CapGrowth
Small CapValue
Small CapGrowth
Per
cent
All
ocat
ion
Time Time
-8
-4
0
4
8
Per
cent
Ret
urn
Performance Attribution
Stock SelectionStyle Allocation
![Page 9: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/9.jpg)
Investment Style as a Determinant of Return
0
2
4
6
8
10
12
14
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Deep Value
Core Value
![Page 10: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/10.jpg)
Manager Sub-Style DiversificationReduces Tracking Error
Mazama 13.9Roberston Stephens 11.0Wall Street Associates 9.5Nicholas Applegate 7.8Sawgrass 13.1
Combination 5.8Average Small Cap Growth Fund 9.1
Small Cap Growth
Manager Tracking Error
![Page 11: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/11.jpg)
Style Volatility is Increasing
Best Performing vs. Worst Performing U.S. Equity Style
0
5
10
15
20
25
30
35
1995 1996 1997 1998 1999
Ret
urn
Dif
fere
nce,
Rol
ling
3 M
onth
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Sub-Style Volatility is Increasing
0
5
10
15
20
25
30
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
5 Year Tracking Error Range of Small Cap Growth Funds
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Returns to Technology areDriving Style Volatility
-200
0
200
400
600
800
1000
0 1 2 3 4 5 6 7
Years into Bull Market
Cum
ulat
ive
Wea
lth
Adv
anta
ge v
s S
&P
500
S&P Technology (1992-1999)
![Page 14: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/14.jpg)
But We Have Been There Before
-200
0
200
400
600
800
1000
0 1 2 3 4 5 6 7
Years into Bull Market
Cum
ulat
ive
Wea
lth
Adv
anta
ge v
s S
&P
500
S&P Technology (1992-1999)
S&P Tobacco (1985-1992)
![Page 15: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/15.jpg)
Investment Styles Go In and Out of Favor
Large Cap Value OutperformsLarge Cap Growth Outperforms
Source: Russell
0
5
10
15
20
25
30
1980 1985 1990 1995 1999
LCVOutperforms
by 49%
LCGOutperforms
by 48%
LCVOutperforms
by 55%
LCGOutperforms
by 60%
![Page 16: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/16.jpg)
Wide Divergences Exist Between theLeast and Most Expensive Stocks in the Russell 1000
17.1
104.3
Price/Earnings
1.2
43
Price/Book
Source: Wilshire
Cheapest Quartile
Richest Quartile
![Page 17: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/17.jpg)
Value Manager Drift in 1999
Technology Finance Price / Price /Weighting Weighting Earnings Book
Top Quartile 18.4 17.3 30.4 6.9
Bottom Quartile 6.7 23.6 23.9 4.5
Russell 1000 Value Index 7.4 30.7 20.3 4.8
Source: Morningstar
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Are These Value Stocks?
Price/ Price/Earnings Book
MCI Worldcom 30.0 3.3Motorola 45.7 6.6Sprint 37.0 4.8Micron Technology 64.8 6.1
![Page 19: What’s New With Investment Styles?. Past Performance as a Determinant of Return Predictive Ability of Past Performance Source: Morningstar 505 50% 1990-19941995-1999.](https://reader030.fdocuments.in/reader030/viewer/2022032802/56649e185503460f94b041a0/html5/thumbnails/19.jpg)
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