What’s New With Investment Styles?

Past Performance as a Determinant of Return

Predictive Ability of Past Performance

Source: Morningstar

505

50%

1990-1994 1995-1999

56%

44%

1990-1994 1995-1999

The Importance of Asset Allocationin Explaining Total Portfolio Returns

Contribution to Return Variation

Source: Brinson, Singer, and Beebower (1991)

Security Selection 4.6%Market Timing 1.8%

Other 2.1%

Asset Allocation91.5%

The Importance of Investment Stylein Explaining Individual Manager Returns

Contribution to Return Variation

Source: Sharpe (1992)

Investment Style 90%

Active Management 10%

What is Investment Style?

Large Capitalization

Small Capitalization

Value Growth

Large Cap Value Large Cap Growth

Small Cap Value Small Cap Growth

Investment Style as a Determinant of Return

Growth Outperforms

Value Outperforms

Differences in Style Returns for U.S.

Equities

0

5

10

15

20

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Large Cap Outperforms

Small Cap Outperforms

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 990

5

10

15

20

Source: SEI Investments Management Corporation

Style Distribution of Equity Manager Universe

Large Cap Value Large Cap Growth

Small Cap Value Small Cap Growth

Performance Attribution UsingStyle Analysis

Effective Mix

Large Cap Value

Large CapGrowth

Small CapValue

Small CapGrowth

Per

cent

All

ocat

ion

Time Time

-8

-4

0

4

8

Per

cent

Ret

urn

Performance Attribution

Stock SelectionStyle Allocation

Investment Style as a Determinant of Return

0

2

4

6

8

10

12

14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Deep Value

Core Value

Manager Sub-Style DiversificationReduces Tracking Error

Mazama 13.9Roberston Stephens 11.0Wall Street Associates 9.5Nicholas Applegate 7.8Sawgrass 13.1

Combination 5.8Average Small Cap Growth Fund 9.1

Small Cap Growth

Manager Tracking Error

Style Volatility is Increasing

Best Performing vs. Worst Performing U.S. Equity Style

0

5

10

15

20

25

30

35

1995 1996 1997 1998 1999

Ret

urn

Dif

fere

nce,

Rol

ling

3 M

onth

Sub-Style Volatility is Increasing

0

5

10

15

20

25

30

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

5 Year Tracking Error Range of Small Cap Growth Funds

Returns to Technology areDriving Style Volatility

-200

0

200

400

600

800

1000

0 1 2 3 4 5 6 7

Years into Bull Market

Cum

ulat

ive

Wea

lth

Adv

anta

ge v

s S

&P

500

S&P Technology (1992-1999)

But We Have Been There Before

-200

0

200

400

600

800

1000

0 1 2 3 4 5 6 7

Years into Bull Market

Cum

ulat

ive

Wea

lth

Adv

anta

ge v

s S

&P

500

S&P Technology (1992-1999)

S&P Tobacco (1985-1992)

Investment Styles Go In and Out of Favor

Large Cap Value OutperformsLarge Cap Growth Outperforms

Source: Russell

0

5

10

15

20

25

30

1980 1985 1990 1995 1999

LCVOutperforms

by 49%

LCGOutperforms

by 48%

LCVOutperforms

by 55%

LCGOutperforms

by 60%

Wide Divergences Exist Between theLeast and Most Expensive Stocks in the Russell 1000

17.1

104.3

Price/Earnings

1.2

43

Price/Book

Source: Wilshire

Cheapest Quartile

Richest Quartile

Value Manager Drift in 1999

Technology Finance Price / Price /Weighting Weighting Earnings Book

Top Quartile 18.4 17.3 30.4 6.9

Bottom Quartile 6.7 23.6 23.9 4.5

Russell 1000 Value Index 7.4 30.7 20.3 4.8

Source: Morningstar

Are These Value Stocks?

Price/ Price/Earnings Book

MCI Worldcom 30.0 3.3Motorola 45.7 6.6Sprint 37.0 4.8Micron Technology 64.8 6.1

Conclusions

Returns to technology are creating wide divergences in valuation and index returns

Sub-style variability is increasing, but can be managed with multiple manager portfolio construction

It is much harder to analyze sub-styles than it is to analyze styles