Style rotations, where investors switch one type of investment style for another, are nothing new. At some point during most investment cycles, different styles – such as growth, quality, value and high dividend – will outperform at different points as investors rotate in and out depending on their outlook for the future.
For the purpose of this piece, we shall refer to the following styles as defined by MSCI:
- Growth: companies that exhibit above-average growth, typically assessed on both long- and short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.
- Value: stocks that trade for less than their intrinsic value, typically assessed on metrics such as book value to price, 12-month forward earnings to price and dividend yield.
- Quality: long-term winners with strong competitive advantages, typically characterised by high return on equity, stable year-over-year earnings growth and low financial leverage.
- High dividend: stocks offering higher dividend income and quality characteristics than average, and dividend yields that are both sustainable and persistent.
In practice, there can be…