Discussion: “Individual-Firm Style Loadings,Unrecorded Economic Assets,and Systematic Risk”

Classifying stocks and stock portfolios into “investment styles” is widely practiced in portfolio management. The most common styles are “growth” versus “value” and “small capitalization” versus “large capitalization.” There are several purposes for this classification, but generally practitioners seem to believe that various segments of the markets are inefficient and that it is appropriate to judge a portfolio manager against peers in the segment. The classification is also widely used as a communication tool between portfolio managers and their clients. Practitioners believe that the firms in each style classification have different return and risk characteristics from firms in other styles and that communicating style gives useful information about the portfolio manager. Finally styles are usually defined by variables such as market value of equity to book value of equity and cash flow variable but typically, styles are not deterministic functions of these variables since subjective judgment is used by whoever defines the style.