Style analysis is becoming an increasingly popular buzzword in the securities industry. More and more professionals continue to embrace this new discipline as an important new way to further understand and properly recommend investment funds to their clients. Globe Interactive is proud to be the first and only provider of hypothetical illustration software to offer access to this powerful statistical information.  Our analysis is offered by Ibbotson Associates, a highly regarded Chicago-based investment consulting, software and data products firm.

Since research indicates that over 90% of a fund’s performance can be explained by its asset allocation rather than the manager’s ability to pick stocks, it is important to understand which asset classes influence the performance of a fund and to what extent. If Japan stocks rise in value for example, it only makes sense that funds which invest in Japan stocks will experience a similar increase. Through statistical analysis of a fund’s total returns, and comparisons to multiple asset classes as represented by market indexes, style analysis seeks to explain the reason a fund performs as it does.

What is Returns-Based Style Analysis?

Pioneered by William F. Sharpe, returns-based style analysis allows investment professionals to evaluate portfolio managers, and to approximate fund investment styles without a detailed and time-consuming examination of portfolio holdings. Whereas fundamental analysis identifies a manager’s style based on actual holdings, returns-based style analysis estimates a portfolio manager’s style by determining the mix of passive benchmarks (e.g., the TSE 300) that best matched the actual returns of the fund. For example, if the HySales style weights showed a 50% allocation to large company growth, that does not mean that 50% of the portfolio was comprised of large company growth stocks. It does mean, however, that the fund behaved as if 50% of the portfolio was allocated to a large company growth index, such as the Russell 300 Growth Index.

Using Style Analysis

Returns-based style analysis enables an analyst to go beyond the most recent "snapshot" of fund holdings. It can provide a historical perspective of how the fund has behaved, and how it might behave in the future. Such information can be extremely beneficial when designing and implementing an investment plan. The style weights displayed in Globe HySales will help you to identify funds that satisfy your clients’ long-term asset allocation strategies.

With style analysis, more intelligent decisions about fund selection are now possible. Style analysis is often useful in determining whether an equity fund is oriented toward growth or value. For example, if you believe that value stocks will outperform growth stocks in the near future, you might run a Funds Filter on the Large Cap Value factor to find funds which perform as if they invest heavily in value stocks.

In Globe HySales, you will find that the style analysis breaks down fund performance into 14 asset classes. A numerical factor for each class indicates the extent to which the fund’s performance can be explained by movements in that particular asset class.

For example, a given fund may have a factor of 35 for the Japan Stocks asset class. This indicates that, based on past performance history, if an investor put $100 into the fund, they would own the equivalent of about $35 of Japanese stocks. Another way to think about it is to consider that if Japan Stocks as an asset class were to rise 10% in value, this fund would be expected to rise 3.5% (if all other factors remained equal). Other factors for our example fund might indicate that portions of the fund behave like Emerging Market Stocks, International Bonds, or other asset classes.

In Globe HySales, you will find this style information on Page 4 in the Profile View. It can be used for sorting, filtering, and printing.

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