While Value and Growth investing styles are typically purely defined, the “middle” style tends to be more subjective. Most indexes that seek to track the middle style are typically “Blend,” whereby they hold stocks that are considered both Value and Growth. This approach implies that investing in the “middle,” or Core, is not worthwhile and that an aggregated Blend approach is enough. In order to determine if Core is a worthwhile investing style, the historical performance differences of the domestic equity Morningstar Large Cap Core, Mid Cap Core and Small Cap Core are compared against the performance of the Morningstar Blend indexes and the Russell indexes (which are also Blend) on a return and market-factor-adjusted basis. The results of the analysis suggest that while the outperformance of Core over Blend is not statistically significant, Core indexes have historically outperformed Blend indexes on a return and market-factor-adjusted basis, with slightly less risk.
Investing In Style
The concept of investing in styles is not new. In 1934 Graham and Dodd documented the superior performance of strategies that invest in high-dividend yield stocks in the U.S. This gave rise to what has become known as the value style (although it’s likely had different names through time). In 1977 a study published by S. Basu documented that low P/E stocks had historically outperformed large-cap stocks in the U.S. by a margin that could not be explained by conventional measures of risk. Similarly, in 1981 a study published in the Journal of Financial Economics by Rolf Banz documented that small-cap stocks had historically outperformed large-cap stocks in the U.S. by a margin that could not be explained by conventional measures of risk. This was followed by a number of other papers, perhaps most notably research by Fama and French  that identified risk factors that are highly correlated with long-term historical returns, namely company size and value orientation.
The findings of Basu, Banz and other researchers that followed gave rise to the concept of the “Style Box” introduced by Morningstar in 1993. The equity Style Box is a nine-square grid that classifies securities by market capitalization along the vertical axis and by value and growth characteristics along the horizontal axis and has become perhaps the most commonly utilized method of categorizing U.S. equity mutual funds. Morningstar’s equity style methodology uses a “building block,” holdings-based approach that is consistent with Morningstar’s fundamental approach to investment research. Style is first determined at the stock level and then those attributes are “rolled up” to determine the overall investment style of a fund or portfolio.
The importance of style investing can be witnessed in the naming methodology utilized by many U.S. fund companies that call funds “Mid-Cap Growth” or “Small Value,” etc., to inform the potential investors of the target equity exposure of the fund. Style groups, such as those used by Morningstar in its fund categories, have become the primary peer groups for mutual fund comparison purposes and funds that have performed well historically (e.g., are “5 star” funds within their respective Morningstar categories, etc.) tend to feature such information prominently in sales materials. Morningstar even implicitly recognized the importance of rating funds within specific styles versus broad groups when it changed its Star Rating system in 2002.
Core Vs. Blend
A variety of companies such as Dow Jones, Morningstar, MSCI, S&P and Russell have developed indexes that track the performance of the various domestic equity styles (i.e., the complete style box). While it is impossible to directly invest in an index, there are a variety of ways an investor can obtain those market exposures, e.g., through an index mutual fund or ETF. The methodologies across index providers, though, can differ materially. These differences can result in varying market exposures and varying returns, something that has been documented by Israelsen , among others.