"A Theoretical Foundation for Equity Style Management"(in Japanese)

This paper lays a theoretical and empirical foundation for equity style management. We discuss the economic rationale for the emergence of style managers who either track a pre-specified style index or attempt to beat the style index. A particular focus is on the criteria of selecting active style managers. We will show by an example and also as a mathematical theorem that a sponsor must evaluate active managers relative to the style index, not relative to a broadly-based market index. Whether a particular style is appropriate for the purpose of benchmarking portfolios depends on the risk-return characteristics of the style. The most popular dichotomy between value managers and growth managers is examined in this regard. We summarize the US evidence that the long-run average of returns of value stocks are significantly higher than that of growth stocks, and compare it with the Japanese evidence which we investigated. We show that the most distinct difference between the two countries is that the US value-"anomaly" lasts up to five years, whereas the Japanese value anomaly emerges and disappears within a year. It may suggest that the higher returns of US value stocks could be due to their higher risk while the higher returns of Japanese value stocks are more due to market overreaction to information on firm fundamentals.