Investment Style Box to Style Cube
Currently there are two ways to divide the equity market. One is known as style while another is called as sectors. The style is a 3x3 matrix. The three rows are large cap, mid-cap, and small-cap. The three columns are value, blend and growth. So the investors can pick and choose from one of the 9 styles. Actually, this style matrix is a combination of two ways to think about the market.
One way to think about the companies listed in the market is to think them in terms of their sizes. The big companies and small companies may be operating under different set of constraints. So their performances can be different under different economic conditions. That is why sometimes the large-cap stocks are doing better than the small companies. In other times, the small companies can do much better than the large ones. In the last three years, the small-cap companies performed well.
Another way to think about the stocks is in terms of their relative valuation. There are many ways to evaluate a stock. Price-earning ratio (P/E ratio) is one of the most popular measures of stocks. When P/E ratio is high, the stocks are considered as growth stocks. Otherwise, the stocks are considered as value stocks. There are gurus in both camps of the style investments. One extreme well-known value investor is Warren Buffett. An example of growth investor is Peter Lynch.
Another way to divide the equity market is by sectors. There are three traditional sectors – materials, energy, and industrial. There are three consumers related sectors – consumer goods, consumer services, and healthcare. There are three capital intensive sectors – technology, utilities, and financial services. Another way to invest in the equity market is to pick and choose among the sectors. Some have developed extensive insights about how to invest the right sectors at the right time. This kind of investing methodology is known as sector-rotation.
I am thinking about the third way to divide the stocks – along the time history. One example of such index is the IPOX-100 index, which includes 100 stocks with trading history less than 1000 days since their initial publish offerings (IPO). First Trust has put this index into the market already. FPX is the ETF underlines the IPOX-100 index. If we combine the time history with style and market capitalization, we can obtain a three-dimensional matrix, which further expand the style box into a style cube. We can divide all stocks according to their IPO dates as young, mature, and seasoned stocks. After finishing the one world fund, the next project could be the style cube.
One way to think about the companies listed in the market is to think them in terms of their sizes. The big companies and small companies may be operating under different set of constraints. So their performances can be different under different economic conditions. That is why sometimes the large-cap stocks are doing better than the small companies. In other times, the small companies can do much better than the large ones. In the last three years, the small-cap companies performed well.
Another way to think about the stocks is in terms of their relative valuation. There are many ways to evaluate a stock. Price-earning ratio (P/E ratio) is one of the most popular measures of stocks. When P/E ratio is high, the stocks are considered as growth stocks. Otherwise, the stocks are considered as value stocks. There are gurus in both camps of the style investments. One extreme well-known value investor is Warren Buffett. An example of growth investor is Peter Lynch.
Another way to divide the equity market is by sectors. There are three traditional sectors – materials, energy, and industrial. There are three consumers related sectors – consumer goods, consumer services, and healthcare. There are three capital intensive sectors – technology, utilities, and financial services. Another way to invest in the equity market is to pick and choose among the sectors. Some have developed extensive insights about how to invest the right sectors at the right time. This kind of investing methodology is known as sector-rotation.
I am thinking about the third way to divide the stocks – along the time history. One example of such index is the IPOX-100 index, which includes 100 stocks with trading history less than 1000 days since their initial publish offerings (IPO). First Trust has put this index into the market already. FPX is the ETF underlines the IPOX-100 index. If we combine the time history with style and market capitalization, we can obtain a three-dimensional matrix, which further expand the style box into a style cube. We can divide all stocks according to their IPO dates as young, mature, and seasoned stocks. After finishing the one world fund, the next project could be the style cube.
posted by Unknown at 6:57 PM
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