Strategy Based Investing is a better way to think about asset managers, making it easier to understand the investment process, form meaningful peer groups, evaluate performance, and build better investment portfolios. While our search started with a focus on building a better framework for categorizing managers, it has since evolved into a superior methodology for building fund and individual stock portfolios.

Our effort began in 2003 with the question: “Why is a manager expected to stay in a market-cap, value-growth Style Box and not drift around the Style Grid?”. After all, shouldn’t the focus be on a well defined strategy and shouldn’t the manager be held accountable for performance relative to the proper strategy peer group. Why is it, then, that a manager is expected to control the characteristics of his or her portfolio in the pursuit of a well defined strategy? And why is it not enough to succinctly lay out a strategy, pursue it relentlessly, and produce superior returns? Instead, investors are forever asking which box the manager fits into. The inordinate attention to the Style Grid, seemed to us, incompatible with the successful pursuit of a well defined strategy.

Strategy Based Investing

After years of conducting our own research and corroborated by other research studies, we concluded that the two most important pieces of information regarding an active investment manager are

1. the investment strategy being pursued, and
2. how successfully it is being pursued.

	COMPETITIVE POSITION Fund managers seek companies with traits such as high-quality management, defensible market position and a track record of innovation.
	ECONOMIC CONDITIONS Fund managers start with a top-down approach and, using macro-economic forecasting, work their way down to favored industries and stocks.
	FUTURE GROWTH Fund managers search for companies poised to grow rapidly relative to others, but are not limited to stocks that traditionally fall under the “growth” category.
	MARKET CONDITIONS Fund managers take into consideration a stock’s recent price and volume history relative to the market and similar stocks as well as the overall stock market conditions.
	OPPORTUNITY Employing strategies popular with hedge funds, these managers focus on market imbalances that are driven by events such as earnings surprises, mergers and acquisitions, spin-offs and companies “going private.”
	PROFITABILITY Fund managers favor companies with impressive gross, operating and net margins and/or return on equity.
	QUANTITATIVE Fund managers using mathematical and statistical modeling with little or no regard to company or market fundamentals.
	RISK Fund managers look to control overall risk, with increasing returns as a secondary consideration.
	SOCIAL CONSIDERATIONS Corporate social responsibility, ecological awareness or religious tenets are a factor for these fund managers when selecting companies. The fund manager may look for these traits or for a lack of these traits.
	VALUATION Fund managers use financial ratios to determine stock valuations and invest in companies that are underpriced, but are not limited to stocks that have traditionally been labeled as “value.”