Definition of 100% equity strategy


What is a 100% equity strategy?

A 100% equity strategy is a strategy commonly adopted by pooled funds, such as a mutual fund, that allocates all investible cash solely to stocks. Only equity securities are considered for investment, whether they are listed shares, over-the-counter shares, or private equity shares.

Key takeaways

  • A 100% equity strategy involves only long positions in stocks.
  • This strategy is common among mutual funds that allocate all invertible cash only in stocks, forgoing riskier instruments such as derivatives or riskier strategies such as short sales.
  • With 100% equity strategies, the style of a portfolio can be subdivided into capital appreciation, aggressive growth, growth, value, capitalization, and income, among others.

Understanding a 100% Stock Strategy

100% equity strategies represent portfolios that only select investments from the equity universe (ie stocks). 100% equity strategies are predominant in the market and encompass a vast majority of offerings.

Generally, very few funds could deploy all the capital available for investments in the stock market without having cash and cash equivalents for transactions and operating activities.

In practice, many 100% equity strategies will have an investment objective or mandate to invest at least 80% in stocks. The 80% threshold is a formality used in registration or regulatory documentation for most equity funds on the market, with many funds being deployed between 90% and 100% in stocks.

100% equity means there will be no bonds or other asset classes. In addition, it implies that the portfolio would not use related products, such as equity derivatives, nor would it employ riskier strategies, such as short selling or buying on margin. Instead, 100% equity implies a more traditional approach to investing in stocks.

Special Considerations

Stocks are generally considered a riskier asset class over alternatives such as bonds, money market funds, and cash.

A well-diversified portfolio of all stocks can protect against individual company risk, or even industry risk, but market risks that may affect the equity asset class will still persist. Therefore, both systemic and idiosyncratic risks are important considerations for aggressive equity investors. As a result, most financial boards recommend a portfolio that includes both equity and fixed income (bonds) components.

Types of stock strategy 100%

In the 100% equity strategy category, an investor will find a wide range of subclasses to choose from, including those that focus on one (or a combination of) labels such as capital appreciation, aggressive growth, growth, value, and income. Here are some of the features investors can expect from some of the top 100% equity strategies.

Increase

Growth investing is a style used by many aggressive equity investors who are comfortable with riskier investments and are looking to take advantage of growing companies. The Russell 3000 Growth Index is a broad market index that helps represent the growth category.

Growing companies offer emerging technologies, new innovations, or a significant industry advantage that gives them above-average revenue and earnings growth expectations.

Value

Value stocks are often referred to as long-term basic holdings for an investor’s portfolio. These equity funds will rely on fundamental analysis to identify stocks that are undervalued compared to their fundamental value.

Investment metrics for value investing often include price-earnings, price-book value, and free cash flow.

Entry

Investing in income is also a superior category for basic long-term positions in a portfolio. The income funds will invest in stocks with a focus on current income. Income from equity investments is primarily focused on mature companies that pay constant dividend rates.

In the income category, real estate investment trusts and master limited partnerships are two categories of publicly traded stocks with unique incorporation structures that require them to pay high levels of income to equity investors.

Market capitalization

Compounding is a popular investment strategy for all equity portfolios. Generally, capitalization is broken down by large cap, mid-cap, and small cap.

Large-cap companies can offer the least volatility, as they have established stable, dividend-paying businesses and earnings. Small-cap companies, on the other hand, are generally considered to have the highest risk, as they are generally in the early stages of their development.

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Mark Holland

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