Style index

A style index is a type of fundamentally weighted index, that that is designed to provide a benchmark for a particular type of strategy. Style indices for the common investment styles (growth, value, income etc.) exist for most of the major stock exchanges.

Style indices provide a fair benchmark for actively managed funds that follow a particular style. Because the choice of investment style often (if not usually) has a major impact on the performance of a fund compared to the market, it is useful to be able to separate this from the effect of the fund manager's stock picking. Many funds that follow a particular style choose an appropriate style index as their benchmark.

Index trackers that follow style indices allow investors to choose an investment style without paying the high fees required by actively managed funds. As trackers, and therefore managed to meet quantifiable criteria such as tracking error, they are not susceptible to style drift.

The selection of securities to include in a style index, and the weighting given to each security, is very similar to the selection of securities by a mechanical investment strategy. Essentially a style index follows the performance (ignoring trading costs and spreads) of a mechanical strategy that is designed to epitomise the style in question.

Like a mechanically invested portfolio a style index may have weightings very different from the typically market cap based weightings of market indices. For example, higher weightings may be given to shares that more closely match the criteria: so that a growth index will give a higher weighting to the higher growth shares.

Closely related to style indices are those that reflect other strategic choices, such as small cap and large cap indices and ethical investment indices.

Good examples of style indices are the Dow Jones Dividend Indices, which tracks Dogs of the Dow type strategies in the US and elsewhere, and the FTSE UK Dividend Plus and MSCI style indices.

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