I’m guessing that many, many of us will be thinking yes to that question currently after a year of loungewear and every type of grooming being an amateur effort (if at all!). But actually, what I’m referring to is the need to check in on your investment style to ensure it still fits your purpose and the landscape ahead.

Time for a Style Makeover
I’m guessing that many, many of us will be thinking yes to that question currently after a year of loungewear and every type of grooming being an amateur effort (if at all!). But actually, what I’m referring to is the need to check in on your investment style to ensure it still fits your purpose and the landscape ahead.

So, what is an investment style? Well, for style you could substitute methodology, theory, philosophy or strategy. What we’re really talking about is the thinking and orientation behind your portfolio’s composition.

Electing for an investment style can guide both your asset allocation (the proportions of each asset class and regional exposure) and how your portfolio is actually populated with individual securities. So far, so simple. Where things get slightly more complex are the classifications therein, as several factors come into play.

Risk rating first

Your first consideration should be your risk-profile, meaning the degree of investment risk you are able and willing to take on. The latter part should not be forgotten as it is vital you are psychologically comfortable with your risk exposure and able to stay the course. It is no good signing up for elevated volatility only for the discomfort to prompt you to sell off at inopportune times.

Once you (or your wealth manager) has determined if you are an aggressive, cautious or balanced investor come the other guiding principles around which a portfolio is built, many of which focus on equities or funds.

There is the question of active versus passive. With funds, do you prefer the cheaper index-tracking ones, or do you want to chase returns in excess of market gains – known as “alpha” – through more expensive actively managed vehicles?

Then there is whether you favour small, mid or large-cap equities and whether you are focusing on growth or value stocks. This last one is likely to be the most interesting question of all to investors currently.

Value versus growth

As the name suggests, value investing aims to seek out stocks that are trading below what their price should be given the company’s fundamentals and prospects, and then selling those securities once the rest of the market catches on. Like all bargain hunting, to be profitable this entails a lot of research. And, now that there is so much transparency and speedily disseminated information, finding pricing disparities is no easy task.

Growth stocks, meanwhile, present with strong profits that are projected to be even more so going forward. Since growth companies should be able to pour even more money into R&D and innovation, you will often find such companies go from strength to strength over the course of many years – and are likely to be attractive, consistent dividend payers too.

Although you don’t have to make an entirely binary choice between these two styles, you will often find that people become evangelical about their “camp”, particularly if one style has served them very well.

Following trends

The thing is, the performance of various investment styles is highly dependent on different market environments and phases of the business cycle. Growth investing has been favoured by many people in the years following the Global Financial Crisis since inflation has been low and so the value of companies’ future profits not as exposed to erosion over time. 

Many have gained through this approach. However, the spectre of inflation now looms large and this might suggest that value is the way to go, particularly the types of stocks that might benefit from any interest rate rises that could manifest in turn. Undervalued commodities, energy and financials may be a good play, as could demonstrably cheap names from unloved sectors generally.

Inflation is not a given, of course. In fact, it feels like nothing much is currently, so perhaps tweaking your portfolio gradually as things become clearer is a better course than a radical makeover right now. Just be aware that growth might have had its time.

Everything goes in and out of style, but in this instance being behind the curve could be costly. Make sure you and your managers are carefully observing investment and macroeconomic trends.

Gary Skovron
Gary Skovron

COO of ARQ