GLOBAL - Investors should be wary of ‘style-investing' which can make higher returns look easy, according to new research by Merrill Lynch Investment Managers (MLIM).
Style investment - investing by the size of a company, growth or value stocks - is not sufficient on its own to secure long-term outperformance, said MLIM. Instead sector and stock selection are more likely to get positive returns.
MLIM's head of asset allocation and economics Richard Turnill said: Generally investors should be cautious of simple mechanical rules that make investment outperformance look easy.
“[MLIM’s] view is that whilst different 'styles' of investing offer tactical opportunities over the course of an economic cycle, no style can be expected to have persistently superior returns over the long run. MLIM does not adhere to a particular style of investing, but says that it prefers to take advantage of tactical opportunities as markets change.
The firm points to how stocks stocks move between investment styles, and how sector biases of different styles change over time. MLIM adds that the influence of sector is similar for small versus large caps but not as extreme.
“This suggests that the potential for superior investment performance by backing one style against another is coming towards its end. Stock specific factors - which anyway 'explain' 70-80% of investment outperformance will remain the dominant factor in determining returns.”
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