Fund managers adopt an investment style, or approach to choosing investments, because they believe it will help them achieve their investment objectives. Because style can have a significant affect on a fund's performance, it is always important to review information about the managers' approach before investing. The most common styles you'll come across are value, growth, blend and contrarian.
Value investing involves buying securities that are selling for less than the fund manager believes they are worth, based on their earnings and other fundamentals. Managers invest this way because they believe the stock is undervalued and its price will eventually increase, so its investors will realize a profit.
Managers practice growth investing by concentrating on companies whose stock they believe will rise significantly in value, providing better returns than the market as a whole. However, growth stocks tend to be volatile as the potential for higher returns brings greater risk, and their prices are often higher in relation to their earnings than other stocks.
Blend investing, which is also known as core investing, combines the principals of value and growth investing. Managers who invest this way choose both undervalued investments and those with great growth potential.
A manager using a contrarian style goes against the market by investing in the companies that most managers are avoiding. The logic is that when other investors are ready to buy, the contrarian can sell at a substantial profit.
Though a manager, with the backing of the fund's board of directors, will likely commit to one style, you can't rely on a consistent methodology. Sometimes a manager will decide to alter the fund's style in an attempt to compensate for weak performance. This style drift could cause an imbalance in your portfolio, leaving it either more aggressive or conservative than you intended. Consequently, it is important to monitor your investments on a regular basis.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.co or through a Scottrade branch office. The prospectus should be read carefully before investing