I like your style
When most people think about diversification, they picture spreading money across shares, bonds, property, or different regions or industries around the world. But active investors often take a step further by looking at the underlying drivers of return that often cut across these categories.
In this article, we focus on investment styles that deliberately tilt portfolios toward specific characteristics to generate excess returns over a benchmark. Styles define and group securities based on different quantitative factors. They help to explain why some investment strategies perform differently from others, even when they sit within the same asset class.
They are also useful for analysing excess returns from active management (“alpha”). By studying how different styles contribute to alpha, investors can better distinguish between genuine investment skill, which involves selecting the best companies, and luck, which can result from simply being in the right style at the right point in time.
What are some of the main styles?
To make thinking about investment styles a bit more intuitive, we will compare them to different types of shoes in your wardrobe. Each pair serves a purpose: some are built for comfort, some for speed, and others for durability.
No single shoe is perfect for every occasion, just as no single style outperforms in every market environment. But by understanding how each style works and when it is most useful, investors can build a more balanced and adaptable portfolio, regardless of the journey ahead.
The investment community has long debated the effectiveness and validity of different styles. Some argue they are enduring drivers of return, while others see them as anomalies that come and go.
Historical returns explain why the debate is so lively: no single style has dominated across every market environment. Value investing, for example, was a standout performer in the 1980s and early 2000s but has been a drag on returns in the last decade. Even quality and momentum, often considered more reliable styles compared to others, have gone through periods of strength and weakness over time.
Ultimately, we believe it comes down to whether investors believe these swings represent structural opportunities that will repeat over time or simply are cyclical noise that cannot be relied upon as a source of outperformance.
Based on the MSCI Factor Classification Standards, we introduce six investment styles: Value, Yield, Quality, Momentum, Minimum Volatility, and Size.
Click on each style below to explore further.
Value
At its core, value investing is trying to identify “cheap” companies. Usually, this is done through simple ratios like price-to-earnings or price-to-book. A more enhanced value approach may build on this by combining multiple valuation measures, adjusting for accounting differences, and filtering out companies that may look cheap but at the same time appear to be fundamentally weak.
Historically, value investing has experienced periods of both strong and weak performance compared to a passive strategy. We think it is a bit like owning a pair of gumboots – not the most fashionable choice, but cheap, dependable, and built to handle rough conditions if you are willing to be patient.
MSCI World Enhanced Value Index (Data source: LSEG)
Yield
Yield strategies emphasise how much cash a business regularly returns to its shareholders. This is often measured through a company’s ability to distribute dividends.
Historically, investors have turned to high-yielding shares as a source of more steady returns, and as a defensive anchor in their portfolios. The key challenge is that a very high yield can sometimes be a warning sign that the underlying business is struggling or may not sustain those payouts over longer time periods.
By carefully filtering for companies with reliable income, yield strategies aim to capture the benefits of regular cash distributions. In that sense, yield investing is like slipping on a pair of jandals – simple, comfortable, and reliable for everyday use, but not built for speed or excitement. And for some occasions, it may simply be inappropriate altogether to wear them.
MSCI World High Dividend Yield Index (Data source: LSEG)
Quality
Quality is a style that focuses on the strength and resilience of a company’s business fundamentals. Instead of simply chasing the cheapest shares or the fastest-growing businesses, quality investing looks for firms with healthy balance sheets, consistent earnings, and high returns on capital.
These are companies that tend to be well-managed and financially disciplined, often able to weather difficult market conditions better than their peers. Historically, quality stocks have often been rewarded for their stability, showing less downside during market downturns while still participating in long-term growth. They are like a polished pair of dress shoes — not the cheapest, but well-crafted, versatile, and appropriate for almost any occasion.
MSCI World Quality Index (Data source: LSEG)
Momentum
Momentum is a style that captures the tendency for shares that have been performing well to keep performing well. It is based on the idea that trends in markets often persist, as investors gradually adjust their expectations and capital continues to flow toward recent winners and away from recent losers.
In practice, momentum strategies look for companies with strong price performance over the past 6 to 12 months. Historically, momentum has been one of the strongest and most consistent styles, though it can suffer from sudden reversals when market leadership changes sharply. Therefore, Momentum behaves a bit like a pair of fashionable sneakers – highly sought after while in style, but quick to lose favour when trends shift.
MSCI World Momentum Index (Data source: LSEG)
Minimum Volatility
Minimum Volatility is a style that aims to reduce the ups and downs of equity investing. Instead of focusing on the highest returns, it prioritises shares of companies that historically show smaller price swings and more stable performance.
These often include businesses in defensive sectors which tend to be less sensitive to economic cycles. Over time, research has shown that portfolios tilted toward lower-volatility stocks can deliver competitive risk-adjusted returns while cushioning investors during market downturns. The trade-off is that they may lag in strong up markets, when riskier stocks are generally in favour.
Minimum Volatility to us is a bit like a pair of walking shoes – designed for comfort and balance, but attracting some questionable looks when you are wearing them to an extravagant (bull run) party.
MSCI World Minimum Volatility Index (Data source: LSEG)
Size
Size focuses on companies with a relatively small market value compared to the broader share market. These businesses often trade with lower liquidity as their shares are often less frequently bought and sold, meaning investors demand higher potential returns as compensation for the added difficulty of entering or exiting positions.
This liquidity premium helps to explain why small-cap stocks have tended to outperform larger companies over longer periods. They can also be less widely researched, creating pricing inefficiencies that skilled investors can exploit. However, small-cap companies can be vulnerable in economic downturns due to these companies often having limited resources, weaker balance sheets, and less access to financing. Investing in small-cap stocks is like wearing a pair of high heels – they can lift you higher and make a striking impression, but they come with more discomfort and a greater risk of missteps along the way.
MSCI World Small Cap Index (Data source: LSEG)
Styles in portfolio construction
When looking at the performance of a fund manager, it is tempting to assume that strong returns are the result of skill alone. In reality, a significant part of a fund’s outperformance often comes from its exposure to a particular investment style. For example, a manager who focuses heavily on value stocks may appear highly skilled when value is in favour, but their results will likely look far less impressive in a period where value is underperforming.
Understanding the underlying style of a fund can help investors separate true manager skill from broader market trends. It may be sensible to benchmark the performance against a style index that aligns with the fund managers’ style, in addition to benchmarking it against the broader market.
Styles also interact with one another in ways that can make a real difference in portfolio construction. By combining different styles, investors can smooth the ride and reduce the likelihood that all funds in their active portfolio struggle at the same time.
This is why active investors often view style exposure as an additional layer of diversification. Just as spreading investments across asset classes lowers risk, spreading active funds across different styles can help balance performance across different market environments, strengthening the resilience of an active portfolio.
We believe it is also important to consider how styles interact with other asset classes. While adding a new style might be beneficial for your share portfolio, it may result in doubling up on characteristics that are already represented in another asset class.
Minimum Volatility and Infrastructure
The 3-year rolling monthly correlation between Minimum Volatility and Infrastructure has mostly sat in positive territory since the mid-2000s, generally ranging between 0.5 and 0.9. This reflects that both strategies share defensive characteristics, often performing similarly across market environments.
MSCI World Minimum Volatility Index, FTSE Developed Core Infrastructure 50/50 Index (Data source: LSEG)
There have been some dips, such as during the Global Financial Crisis and more recently in 2022–2023, where correlations fell closer to 0.5, but generally the correlation has been strong.
For portfolio construction, this suggests that Minimum Volatility and Infrastructure could be considered as similar exposures rather than strongly diversifying strategies in a portfolio. Having exposure to both may limit diversification benefits, although occasional breakdowns in correlation have provided some value during market dislocations in the past.
Yield and New Zealand
New Zealand is often considered a “yield-market”, and indeed the correlations between global yield and the New Zealand share market have been generally positive.
MSCI World High Dividend Yield Index, S&P/NZX 50 Index (Data source: LSEG)
The fact that the S&P/NZX 50 Index is highly correlated with global yield is somewhat surprising, given its concentrated nature. Even with a handful of large companies dominating at various periods in time, yield strategies have generally moved in step with the index, often sitting in the 0.3–0.6 range.¹
For portfolio construction, this insight may also be important. It means that global yield exposure might simply result in doubling up on some of the characteristics embedded in the New Zealand allocation within a portfolio.
Wardrobe of styles
We believe that understanding investment styles is central to evaluating active management and building more resilient portfolios. Styles often help investors identify whether strong fund manager performance stems from genuine skill or from being in the right market environment for their particular style. By disentangling style-driven returns from manager-driven decisions, investors can form a clearer view of true alpha and ensure that compensation for active management is justified.
In portfolio construction, styles act as an additional layer of diversification beyond asset class or geography. No single pair of shoes suits every occasion, and the same is true in investing: every style has its time to shine, but there are also moments of discomfort.
Holding a well-balanced “wardrobe” across a number of the styles we discussed – Value, Yield, Quality, Momentum, Minimum Volatility and Size – helps investors be prepared for changing market conditions. By ensuring there is a sturdy pair of shoes for every terrain, investors can move forward with greater confidence through the cycles ahead.
¹ Strong runs and declines of companies such as A2 Milk and Fisher & Paykel Healthcare have had outsized impacts on the index performance at various points in time.
All analysis presented is based on historical monthly total return series from January 2001 to August 2025.
Past performance is not necessarily a good indicator of future returns.
Makao Investments is a New Zealand-based wholesale investment advisory business that was founded to lift investment advice to a higher standard.