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Russell Analysis: Single vs. Multi-Style Funds
While a Narrow Focus May Yield Higher Returns Short-term, Diversification Offers Benefits Over the Long Haul
Investors generally understand the importance of diversifying their portfolios. Yet many often prefer to place a large portion of their assets into one style of company. They turn to value or growth companies, large-, mid- or small-cap companies-or companies in a particular sector, such as technology or health care.
Style investing isn't new. After all, a "hot" style can provide very high returns. But styles that are hot also go cold. No one style continually offers higher returns in a marketplace characterized by constant change. Just look at the tech-heavy Nasdaq composite index which grew 87% from January 1999 to January 2000 then plummeted 45% between February 2000 and February 2001.
Does this mean that investors should pass on a mutual fund focused on a single style? Not at all. Style funds do enable investors to concentrate assets in an area they believe will outpace the market. But more important, they serve as tools for re-balancing a portfolio that is no longer diversified.
Comparing single- and multiple-style approaches
A single-style fund emphasizes a particular style-value over growth, for example, or small-cap over large-cap. Yet two funds within the same style may be very different. The stocks held in a "style" fund reflect their managers' personalities, philosophies and research techniques. So while two mid-cap funds both seek to generate returns above the market and the style as a whole, each may hold a number of different stocks.
Multi-style funds appeal to investors who seek to diversify their portfolios and protect against the unexpected. Managers choose the best stocks from more than one, though not necessarily all, style possibilities. Sometimes, multi-style funds will be outperformed by style specific funds. At other times, multi-style funds will provide better performance. Overall, returns from multi-style funds will be more stable, smoothing out the roller-coaster ride investors may experience in times of market turbulence.
Date of first use: 03/15/01.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited.
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