Style Isn't Substance: Barra

July 10, 2001 ( - Classifications of investment style mislead investors because they don?t differentiate enough between manager types, nor correctly assess performance, according to a report by Barra Strategic Consulting Group (BSCG).

Further, many managers carrying the ubiquitous growth, core and value labels aren?t directly comparable, and rating a manager on performance relative to a peer group is therefore problematic.

Current Evaluation and Selection Measures

The chief criteria for choosing managers is their three-year performance numbers compared to similar managers and their conformity to a specified benchmark.

Because of the popularity of the current classification and measurement system, a subtle shift has occurred in the use of style, according to the report. Originally it was meant to objectively reflect an investment philosophy, but now managers are under pressure to conform to a style or risk being poorly perceived by the market.

Value Manager or Value Added?

BSCG argues that in the investment process, managers can consider an infinite number of combinations of security characteristics, while the current style classifications of growth, core and value, use only one or two specific characteristics to differentiate managers and define benchmarks.

In contrast, firms such as Morningstar may use a combination of only two quantitative measures, price-to-book, and price-to-earnings, to classify managers in one of the three categories. This results in a complex concept being represented by a very simple classification scheme

Better Measures

BSCG believes that, rather than style, manager selection should be based on skill, or the value added after accounting for broad market movements and style exposures. And performance should not always be evaluated by style benchmark or peer group classification.

The report questions the credibility of benchmarks, pointing out that the weighting of the technology sector in the Russell 1000 Growth index increased from about 25% to almost 60% over the two years ending August 2000, creating a style benchmark trap.

Here, managers were forced to choose between sticking with their investment philosophy or changing their style with the benchmark, in either case risking client redemptions if they don?t measure up to the index.

Although many institutions take a more complex view of a manager?s style and use risk measurement technology to understand the manager’s philosophy, style boxes are not about to be abandoned anytime soon, the report notes.

You can read the full report on the Barra Strategic Consulting Group’s website at