Investment Strategies and Styles
Core concepts
Style analysis classifies managers along value/growth and large/small dimensions (the style box). Understand active vs. passive management, top-down vs. bottom-up selection, and the main equity styles: value (low P/E, P/B, high dividend yield), growth (high earnings growth, high P/E), and core/blend. Know fixed-income strategies: duration management (anticipating rate moves), yield-curve positioning (bullet, barbell, ladder), credit strategies, and immunization (matching duration and convexity to a liability).
Key concepts: active return = portfolio return − benchmark return; tracking error as the SD of active returns; the information ratio = active return / tracking error. Understand style drift and how it undermines style-consistency mandates.
Traps
- Growth vs. value confusion: a stock with a high P/E is typically growth, not value, even if it is "cheap relative to its growth."
- Immunization requires duration matching plus convexity considerations; duration alone leaves residual (convexity) risk.
- Barbell vs. bullet: barbell (short + long maturities) has higher convexity and outperforms on large rate moves; bullet (concentrated maturity) outperforms on small, parallel shifts.
- Passive does not mean zero tracking error-sampling and fees create small deviations.
- Information ratio uses active return over tracking error, not total return over total risk.
Worked example
A manager returns 11% against a benchmark of 9.5%. Active return = 1.5%. Tracking error (SD of active returns) = 4%. Information ratio = 1.5 / 4 = 0.375. A second manager returns 10.5% with tracking error 2%: active return 1.0%, IR = 0.50. The second manager is more efficient per unit of active risk despite lower absolute active return.