Getting to grips with investment styles

You may have come across the term ‘investment styles’ and wondered what it means. Put simply, an investment style is the approach a fund takes when deciding where to invest. 

Different funds use different styles depending on what they’re trying to achieve. Some aim for long-term growth, some focus on delivering an income, and others try to track the market or look for opportunities they believe are being overlooked. 

In this article, we look at some of the main investment styles used within funds and consider their pros and cons.
 

Active investing - the ‘hands-on’ approach

In an actively managed fund, the fund manager decides what to buy and sell based on company research and market analysis in an attempt to perform better than a market index such as the FTSE 100. This approach gives the manager flexibility to respond to different market conditions and aim to take advantage of opportunities as they arise. However, actively managed funds typically come with higher fees, as you’re paying for the manager’s expertise.

Passive investing - the ‘hands-off’ approach

Passive investing involves investing in funds that track a market index like the FTSE 100 - rather than trying to beat it. This means your investment mirrors how the overall market performs, rather than relying on individual decisions about what to buy and sell. It’s generally simpler than active investing and can mean lower fees as a result.

Growth investing - focusing on future potential

Growth investing is about putting money into companies that are expected to grow faster than average. These are often businesses that are expanding, launching new products or operating in fast-moving sectors such as technology or healthcare. Instead of paying out their profits to investors, these companies often reinvest their money to help them grow further. If these businesses are successful, their share prices can rise over time and the value of the fund could grow. However, this type of investing can be unpredictable - if these companies don’t grow as expected, their share prices can fall quickly.

Value investing - looking for opportunities others may have missed

Value investing is about investing in companies that are considered to be undervalued compared to their fundamentals which are being overlooked by the market. These businesses might be out of favour or going through a difficult period, which can bring their prices down. Over time, the idea is that their value is recognised and the fund investing in them can grow. This approach can take patience, as it may take a while for these companies to recover.

Income investing - aiming for regular payments

Income-focused funds are designed to provide a steady stream of payments to investors, usually through dividends from shares or interest from bonds. This can appeal to investors who want a more predictable return, rather than relying purely on growth. Some funds aim to pay income regularly, for example monthly or quarterly. However, it’s important to remember that income isn’t guaranteed and can go up or down.

Key takeaway - mixing styles to spread your investments

No single investment style is inherently better than another - each has its own strengths and performs differently depending on market conditions. Many investors hold funds that combine different investing styles. For example, you might have one fund focused on growth and another that aims to provide income. This helps spread your money across different types of investments, which can reduce risk. Different styles tend to perform differently over time, so combining them can help smooth out the ups and downs.