The importance of equity style diversification

Recent market events have reminded investors again of the importance of diversification. In particular, “Growth” investing has faced a torrid time in 2022, after enjoying strong performance in prior years. In contrast, “Value” investing has enjoyed a strong recovery, after its own “annus horribilis” in 2020.

In this article, we discuss investment style in more detail and, as we look ahead, highlight three ways in which Advisers can achieve portfolio style diversification.

Equity style performance over the past year

Equity markets have recently experienced high levels of volatility. However, this just tells part of the story. There has also been considerable volatility within equities, most notably between different investment styles. As a reminder, equity styles represent the different approaches that many investors take when selecting stocks. For example, a “Growth” style describes an approach which focuses on stocks (perhaps innovative, or immature companies) that investors believe will grow quicker than the market, whereas a “Value” style involves a focus on stocks that look cheaper than the market (often represented by relatively mature, well established firms). If implemented consistently, both styles of investing have been shown to add value in the long-term – but, as we have seen recently, both come in and out of favour in the short-term.