what’s new with investment styles?. past performance as a determinant of return predictive ability...
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What’s New With Investment Styles?
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
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%
The Importance of Investment Stylein Explaining Individual Manager Returns
Contribution to Return Variation
Source: Sharpe (1992)
Investment Style 90%
Active Management 10%
What is Investment Style?
Large Capitalization
Small Capitalization
Value Growth
Large Cap Value Large Cap Growth
Small Cap Value Small Cap Growth
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
Style Distribution of Equity Manager Universe
Large Cap Value Large Cap Growth
Small Cap Value Small Cap Growth
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
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
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
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
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
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)
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)
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%
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
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
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
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