StyleADVISOR

Style Analysis

What is a Style Benchmark?

The style benchmark is a unique benchmark that StyleADVISOR creates for every manager in an analysis using returns-based style analysis. This optimization selects the blend of indices that best describes the way a manager's performance behaves. This allows you to get an accurate picture of the investment style of the manager. The rolling window Style Benchmark identifies shifts in style or style drift.

The Style Benchmark is an excellent performance benchmark. When a manager's performance exhibits excess return over the style benchmark it can usually be attributed to value added by the manager, because variations in return due to style are captured by the benchmark itself.

What is returns-based style analysis?

Returns-based Style Analysis was developed by Nobel Laureate William F. Sharpe in 1988 in order to determine the style of an investment product. It is a mathematical algorithm which selects a blend of indices that is most highly correlated with the total returns of the manager.

For a more mathematical explanation of the Style Benchmark and returns-based style analysis, see The Mathematics of Returns-based Style Analysis. For an academic tutorial on style analysis see Style Analysis Tutorial.

What if my value manager is performing well in a growth market? Will returns-based style analysis classify that manager as a growth manager?

This is a common misconception and the short answer is no. Returns-based Style Analysis selects the combination of indices whose returns move the most like the manager's returns, NOT the combination of indices whose absolute return is most like the manager's return. In our example, the Style Benchmark will show the manager as a value manager. Excess (or under) performance is a different characteristic from style that will be shown in the performance graph and has no effect on the style characteristics.

What is the difference between returns-based style analysis and holdings-based style analysis?

Holdings-based style analysis looks at the stocks and instruments that are held in a portfolio and attempts to categorize each of them by style. Returns-based style analysis looks at the way the portfolio's total returns have behaved and classifies style by comparing them to a set of indices. By understanding a manager's past behavior you can predict how a manager will behave when incorporated into an overall portfolio.

These two techniques do not necessarily compete with one another, as their objectives are different. Returns-based style analysis attempts to explain a portfolio's behavior. Holdings-based style analysis attempts to explain a portfolio's composition.