What Is Investment Style and How It Works

Investment style is a crucial aspect of investing that can make or break your portfolio's performance. It's essentially the approach you take to investing, which can be influenced by your risk tolerance, investment goals, and time horizon.

There are various investment styles, but they can be broadly categorized into three main types: value, growth, and income investing. Value investors look for undervalued stocks with strong fundamentals, while growth investors focus on companies with high growth potential. Income investors, on the other hand, prioritize generating regular income from their investments.

Investment style is not set in stone; it can evolve over time as your goals and circumstances change. For instance, a young investor with a long-term perspective might adopt a growth style, but as they approach retirement, they may shift to a more conservative income style.

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Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio. It's based on several factors, including risk preference, growth vs. value orientation, and market cap.

There are several major styles of investment, including active and passive investing. Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well, while passive investors feel that simply investing in a market index fund may produce potentially higher long-term results.

Investors can also be divided into growth and value seekers. Growth investors seek companies they expect to increase earnings, while value investors look for bargains - cheap stocks that are often out of favor. These two styles may offer a diversification effect, as returns on growth stocks and value stocks are not highly correlated.

Investment style is also influenced by the size of a company, with some investors using the size of a company as the basis for investing. This is known as the "Size premium", where the highest returns have come from stocks with the lowest market capitalization.

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Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio. It's based on factors such as risk preference, growth vs. value orientation, and/or market cap.

Investment style helps set expectations for risk and performance potential, and it's an important aspect used by institutional managers in marketing and advertising the fund to investors looking for a specific type of market exposure.

Major styles include active vs. passive, growth vs. value, and small cap vs. large cap. These styles may offer a diversification effect, reducing risk and still enjoying long-term return potential.

Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well, while passive investors feel that simply investing in a market index fund may produce potentially higher long-term results.

Growth investors seek companies they expect to increase earnings by 15% to 25%, while value investors look for bargains – cheap stocks that are often out of favor.

Some investors use the size of a company as the basis for investing, with studies suggesting that smaller companies have historically offered higher returns, but also higher price volatility.

Investment styles can be used in the study of asset prices and can serve as a useful framework for identifying anomalous price movements in stocks.

Here are some key characteristics of major investment styles:

The Annual Target Portfolio is a crucial part of CPP Investments' strategy, guiding the allocation of funds to achieve the desired risk-return balance. It's constructed in two parts: a diverse set of actively managed strategies (the Active Portfolio) and a set of balancing and financing strategies (the Balancing Portfolio).

The Active Portfolio accounts for more than half of the Fund, with the remainder allocated to the Balancing Portfolio. This split is designed to maximize sustained long-term returns without incurring undue risk.

To achieve this balance, the Annual Target Portfolio sets out the targeted weights of each active strategy for the current fiscal year, along with public market index benchmarks for each strategy. These benchmarks help assess the net value added relative to a representative passive alternative.

The targeted weights are set within Board-authorized bands of asset class and geographic weights, ensuring that the portfolio remains well-balanced and globally-diversified. This approach allows CPP Investments to take advantage of short-term market dynamics and hold assets whose rewards may take longer to emerge.

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Here's a breakdown of the Annual Target Portfolio's composition:

By focusing on the Annual Target Portfolio, CPP Investments can ensure that its investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

Investment Objectives are the core of any investment strategy, and they play a crucial role in determining the investment style.

A growth investor's primary objective is to maximize long-term capital appreciation.

Conservative investors, on the other hand, focus on preserving capital and generating regular income.

Investors with a moderate risk tolerance often aim for a balance between growth and income.

Ultimately, the right investment objective is one that aligns with your personal financial goals and risk tolerance.

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Accepting volatility is key to long-term investment success. The CPP Fund's long horizon and certainty of assets mean it can tolerate and absorb short-term changes in investment values.

We can look through market cycles and capture opportunities that arise during market downturns. This allows us to be patient and flexible investors.

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Embracing risk is essential to achieving higher returns. By taking on compensated risk, we can build a portfolio that supports the CPP and its members and beneficiaries over the long term.

The more risk we're willing to accept, the higher the potential return. As long as that risk is priced and evaluated properly, we can increase the potential long-term returns.

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We use a variety of strategies for buying, weighting and selling individual investments, seeking to generate value in both rising and falling markets. Our internal and external managers can profit from buying undervalued and selling overvalued public securities.

We can participate in some of the largest private transactions and opportunities in the world, through funds, co-investments and direct ownership. This allows us to manage the pace of participation in private investments, both equity and debt, through disciplined evaluation and relative value judgements.

Some key aspects of our investment strategy include:

Selection is a crucial part of our investment strategy at CPP Investments. We use a variety of strategies for buying, weighting and selling individual investments to generate value in both rising and falling markets.

Our internal and external managers employ a range of techniques to identify undervalued and overvalued public securities, allowing us to profit from buying low and selling high.

We also participate in large private transactions and opportunities through funds, co-investments, and direct ownership, which can provide significant returns.

One of the key benefits of our approach is that we can manage the pace of participation in private investments, both equity and debt, through disciplined evaluation and relative value judgments.

This allows us to take a more thoughtful and considered approach to investment, rather than being driven by a commercial need to invest in a particular sector or strategy.

We also consider the impacts, risk, and opportunities of climate change on specific companies and investments, which helps us make more informed decisions.

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Here are some of the ways we generate value through investment selection:

By taking a thoughtful and considered approach to investment, we aim to maximize returns while minimizing risk and preserving capital.

The two-account, two-pool structure is a key component of CPP Investments' investment strategy. This structure allows for the allocation of opportunities, individual investments, and investment programs to be managed equitably between the base and additional CPP accounts.

The base CPP investment portfolio is entirely allocated to the "Core pool", which is a broadly diversified pool across asset classes, geographies, and management strategies. This pool is managed to the risk level appropriate for the base CPP.

A substantial proportion of additional CPP cash inflows (60% to 65% in fiscal 2022) are allocated to the Core pool. This allows for a significant amount of the additional CPP's cash to be invested in a diversified portfolio.

The remaining assets in the additional CPP's investment portfolio are invested in the lower-risk "Supplementary pool". This pool consists entirely of fixed-income securities.

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The two-pool structure enables the proportions of the two pools held by the additional CPP account to change over time. This is done by adjusting how much of the weekly incoming cash flow from the additional CPP goes into each pool.

To illustrate this, consider the example of the Core pool and Supplementary pool. Here's a breakdown of how they're used:

This structure respects and enables the distinct risk targets of the base and additional CPP investment portfolios. It also avoids the significant costs and complexity that would be associated with managing each account separately.