Koenig: New Style Investing

Enhancement of defensive/dynamic indexes brings new perspective.

Reviewed by: David Koenig
Edited by: David Koenig

Enhancement of defensive/dynamic indexes brings new perspective.

Style investing has been widely adopted by institutional and retail investors alike since Russell Investments introduced the first indexes based on size and valuation segmentation in the 1980s.

Since that time, style indexes have become standard benchmarks for measuring investment manager performance and important tools for asset allocation and portfolio construction. As of Dec. 31, 2013, assets in exchange-traded products and mutual funds benchmarked to style indexes totaled more than $1.4 trillion among more than 1,000 products, according to Morningstar.

But what exactly is "style"?

Investors have traditionally associated style investing with segmentation by size (large cap/small cap) and valuation (growth/value). However, in recent years, the concept of style has been enhanced with the introduction of indexes based on an additional risk dimension (defensive/dynamic).

While investors might once have considered value more defensive and growth more aggressive, research has shown that style is more nuanced and defensive/dynamic and growth/value represent different style dimensions.

Defensive and dynamic indexes take into account a company's historical stock price volatility as well as balance sheet and earnings "quality" characteristics such as leverage, earnings variability and return on assets.

Defensive-oriented companies have historically been more stable and less sensitive to business cycles, credit cycles and market volatility. Dynamic-oriented companies tend to be less stable and more economically sensitive, with typically higher-than-average stock price volatility.

This enhanced insight into style offers investors new ways to think about style to help them better understand markets and take greater control in constructing more precise portfolios based on their investment objectives and tolerance for risk.

Understanding Different Style Dimensions


  • Large cap: Companies with higher market capitalizations
  • Small cap: Companies with lower market capitalizations


  • Value: Companies with lower valuations and lower growth rates
  • Growth: Companies with higher valuations and higher growth rates


  • Defensive: Companies with less economic sensitivity and more stable earnings profiles
  • Dynamic: Companies with greater economic sensitivity and more variable earnings profiles

New Ways To Think About Style

Style leadership can vary significantly over time, so viewing the market through multiple style lenses can help investors better understand various market environments.

Just as large-cap and small-cap leadership can move in cycles, different market environments might favor value over growth, defensive over dynamic or some combination of styles. By viewing the market through all of these style lenses, investors have the opportunity for greater insight into market drivers and control over their portfolio's risk/return profile.

For example, defensive has historically led dynamic during periods of heightened market volatility and economic contraction. As shown in the chart below, during the market decline from Oct. 9, 2007 through March 9, 2009, the Russell 1000 Defensive Index significantly outperformed the Russell 1000 Dynamic Index.

This period also highlights that defensive is not simply value and dynamic is not simply growth. Over the same period, the Russell 1000 Growth Index outperformed the Russell 1000 Value Index, although the performance difference was smaller than for the defensive and dynamic indexes.

By contrast, dynamic-oriented companies have historically outpaced more defensive companies during cyclical recoveries. As the chart illustrates, during the market advance since March 9, 2009, the Russell 1000 Dynamic Index significantly outperformed the Russell 1000 Defensive Index.

During this period, the Russell 1000 Value Index led the Russell 1000 Growth Index, although the performance difference was again narrower than for defensive and dynamic.



Source: Russell Investments



Multiple Style Lenses

Looking at performance differences among various style indexes in 2013 helps further illustrate the insight provided by considering multiple styles. In large cap, the defensive and dynamic indexes showed greater differentiation than the growth and value indexes for the full year through Dec. 31, 2013, while the opposite has been the case in small cap.

The Russell 1000 Growth and Russell 1000 Value indexes posted similar total returns of 33.5 percent and 32.5 percent in 2013, respectively. Meanwhile, the Russell 1000 Dynamic Index outperformed the Russell 1000 Defensive Index by 4.4 percentage points, with total returns of 35.3 percent and 30.9 percent, respectively.

By contrast, in small cap, the difference in performance between growth and value during 2013 was significantly greater than the performance difference between defensive and dynamic. The Russell 2000 Growth Index (43.3 percent) outperformed the Russell 2000 Value Index (34.5 percent) during the year by 8.8 percentage points. While the Russell 2000 Dynamic Index (40.2 percent) also outperformed the Russell 2000 Defensive Index (37.5 percent) for the year, the gap was a narrower 2.7 percentage points.

2013 Style Index Total Returns, as of Dec. 31, 2013
YearRussell 1000 Growth Total Return (%)Russell 1000  Value Total Return (%) Russell 1000 Dynamic Total Return (%)Russell 1000 Defensive Total Return (%)
YearRussell 2000 Growth Total Return (%)Russell 2000  Value Total Return (%) Russell 2000  Dynamic Total Return (%)Russell 2000  Defensive Total Return (%)


These differences in performance help illustrate how growth and value style indexes can provide perspective along a valuation dimension, while defensive and dynamic indexes can offer insight along a risk dimension.

By viewing the market through each of these individual style lenses, investors have an opportunity to enhance their style palette to better understand market behavior and take greater control over their portfolios.

For example, investors seeking a smoother ride over the long term might choose to tilt their portfolios toward a more defensive style, while investors with a market view about a cyclical recovery might opt to tilt toward more dynamic companies.

Additionally, investors have the opportunity to combine styles by focusing on companies that exhibit growth characteristics but are more defensive in nature, or on companies with value characteristics but that are more dynamic economic sensitivity.

By considering multiple dimensions of style based on size, valuation and stability, investors have an opportunity to better tailor their portfolios to fit their individual objectives.

David A. Koenig, CFA, FRM, is an investment strategist for Russell Investments.