|Return-based style analysis (RBSA) draws from Bill Sharpe’s style analysis model, which stipulates that a manager’s investment style can be determined by comparing the returns on a portfolio with those of a certain number of selected indices. Through quadratic optimization modeling, RBSA is an effective way to test whether a fund maintains its professed style mandate. RBSA examines a fund’s style over a period of time and tells how the portfolio’s returns behave, rather than the stocks the portfolio is actually holding (holding-based).
Holding-based style analysis (HBSA), by contrast, analyzes each of the securities that make up the portfolio. The securities are studied and ranked according to different characteristics that allow their style to be described. The results are aggregated at the portfolio level to obtain the style of the entire portfolio. Where RBSA is typically applied over a specified period, HBSA is typically conducted at a single point in time.
Reasons why we use return-based over holding-based style analysis:
Overall, we believe that HBSA is a more tedious and time-consuming approach. Holding-based is more of an accounting-driven approach, which stresses characteristics and categorization, rather than return behavior.