Classifying Equity Styles and Comparing Their Historical Returns

Summary

This report outlines ways to classify equities by market capitalization, growth, and value. It uses the median market capitalization to separate large and small companies, and describes three approaches to growth and value classification: composite ranking, two-dimensional scoring, and clustering. In the two-dimensional method, growth and value scores define axes; quadrant placement assigns style categories, while distance from the origin indicates style strength. The report notes that MSCI style indices use a similar construction.

Its historical comparisons find that small-cap balanced stocks had the highest cumulative return among the styles examined, and that balanced growth-value groups led within both large- and small-cap categories. It also reports stronger co-movement between small-cap balanced and small-cap growth stocks, and a change in which large-cap style tracked balanced stocks more closely around 2015. Industry style distributions are presented as a basis for further study. These are historical findings, not proof of future performance; the report flags over-optimization and model failure risks.

Key ideas

• Market-cap style can be divided using the median capitalization of the stock universe.
• Growth and value styles can be assigned through composite ranks, two-axis scores, or clustering.
• In the two-axis approach, quadrant location indicates style and distance from the origin indicates its strength.
• The reported historical comparisons favor balanced styles, especially among small-cap stocks.
• The report cautions that over-optimization and model failure may undermine the findings.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.