Classifying stocks and portfolios in these ways provides a meaningful insight into the nature of the investment process and the likely behavior of portfolios under particular economic or market scenarios. They enable investors to better analyze and understand the characteristics and behavior of the UK equity market with respect to their equity portfolios. Their use can lead to more informed decision making, in particular avoiding unnecessary manager terminations where cyclical downturns in performance are interpreted as poor management. Consultants will be better able to advise clients on rational and logical ways to combine managers together within a multi-manager fund. Money managers can better explain their performance to clients and prospects with reference to underlying style trends.
Book value is linked to historic earnings success and reinvestment within a company.
Book value is readily available and is less likely to be subject to distortion by a company's management than, say, dividends or earnings. This is of particular benefit in the UK where there are frequent new issues. Using a single factor lends simplicity to the task of building and calculating an index. However, these methodologies vary widely and selecting a combination of factors will, of necessity, be arbitrary. This approach avoids sudden changes in the status of such stocks and reflects reality since these stocks can exhibit both growth and value characteristics.