Investors need balance broadly between stocks and fixed income – also within each of those segments. For equities, Kyle Tetting shows how a style box gives a quick breakdown on size and style. Kyle spoke with Joel Dresang in a Money Talk Video. The transcript follows.

Joel Dresang: Kyle, when you’re talking with an investor about the equity side of their holdings, a lot of times, you use a style box. Can you explain what that is?

Kyle Tetting: A style box is a proprietary tool from Morningstar, or originally from Morningstar, which gives us the ability to break out into nine different categories the style of an individual portfolio or even an individual stock.

Joel: So, top-to-bottom, it looks at size. Left to right, it looks at value and growth?

Kyle: That’s right. So we have our value-style companies on the left. We have our blend or our core, in the middle, and on that far right side we have the growth-style companies.

Joel: So size matter, and the value – the style – matters.

Kyle: I think the big thing we’re looking at is to make sure that for every client’s portfolio, for every individual investment we look at, we need to know what kind of balance they have to value, blend and growth.

We’re really looking at the economic conditions that are out there and how we’re allocated, relative to those conditions.

Joel: So why do you do that? Why is it broken down that way?

Kyle: Looking particularly at value and growth, if you look back over almost the last hundred years, since well before the Great Depression, value has actually outperformed growth.

Historically we’ve overweighted value, and so when we’re looking at a portfolio, we tend to see that side of the style box, that left-hand side, particularly the top left-hand side, a little bit heavier than the rest. So the allocations are a little bit higher there.

The same can be said of small caps outperforming large caps. Little bit different story there in that small caps are a lot more volatile than large caps are. So we tend to not put as much weight in the small cap area of the market. But we have historically overweighted value because that story is there of value outperforming over time.

Joel: Do individual circumstances of the investors, do those factor into this too?

Kyle: They certainly can.  We may be more willing to allocate to growth vs. value because income isn’t a need. Or we may more willing to allocate to small caps because the time horizon is longer.

Joel: So, again, the style box is something that you use to look at the balance of the equity side of a portfolio, but that’s also within the balance of the fixed-income side.

Kyle: Yes. Really, the style boxes, at least the equity style boxes are looking specifically at the equity side. And, again, when we’re talking about balance, it’s not just here’s your balance in equities, but here’s the equity piece and how it’s balanced. And here’s your fixed-income piece and how it’s balanced. And here are some other categories.

Kyle Tetting is director of research at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May

(initially posted July 11, 2014)

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