Parenting is hard. How do you explain to your upset child why you took your other child for ice cream to celebrate their “B” in math when you simply said “congrats” on their own “A” in math? There may be a perfectly defensible reason for your actions. Let’s suppose one of your children is a math whiz and the other is gifted in Language Arts. You expect an “A” from each of them in the subjects in which they naturally excel. Yet you also recognize the sacrifices, struggles, and long hours they endure to raise their typical “C” to a “B” in subjects that don’t come naturally to them. 

How Does This Apply to Investment Performance?

In short, we expect different things from different funds and managers. Some managers aim to limit downside risk while others do not. Some fund managers tend to perform best when value stocks (or growth stocks) are performing well. There are many other “style biases” that make certain funds more likely to perform well at certain times. 

If you grew up in the 80s or 90s, you may have heard your favorite wrestler or rapper say they were “stylin’ and profilin’”. They were speaking of their stylish clothes and lavish cars and homes. While we too are a stylish bunch on the LPL Investment Manager Research (IMR) team, our version of styling and profiling involves setting expectations for the portfolio characteristics and performance patterns we will get from a fund or manager. 

(Investment) Stylin’ 

Many managers focus on certain types of securities. Their preferred investment habitat, so to speak, is likely to influence how and when they perform. As such, we expect different things from different managers. 

• Value or growth. Many funds have “value” or “growth” in their name and accordingly invest most of their assets in value or growth stocks. Even among a peer group of value funds, some funds are more value-tilted than others, such as “deep value” funds focused on stocks with extremely low prices, often in need of a turnaround. Whether value or growth is in favor with investors can influence the performance of managers that tilt one way or another — even within a particular peer group.   
• Company size or market capitalization. Many funds have “large cap” or “small cap” in their name and accordingly invest most of their assets in large or small companies. Even within a large cap or small cap peer group, typically no two funds have identical size exposures. Within small cap funds, some tilt towards the smallest companies, so-called micro-caps, while others stay higher in market cap. Whether larger or smaller caps are in favor with investors can influence the performance of managers that tilt one way or another — even within a particular peer group.   
• High-quality companies. Some managers focus on companies they believe are better operators. For example, they may avoid companies that lack current earnings while favoring high-return businesses and those with low or modest debt. These high-quality stocks often deliver a distinct performance pattern, performing well or poorly depending on whether they are in favor with investors.  
• High or low credit quality (fixed income). Fixed income managers differ in their willingness to own lower-rated bonds, such as those rated below investment-grade, often referred to as high-yield bonds. High-yield bonds tend to have challenges during difficult economic and market environments. 
• Interest rate risk (fixed income). Bonds with longer duration, which is a measure of interest rate risk, tend to perform worse than shorter-duration bonds when interest rates rise. Typically, a bond has a longer duration when it is expected to mature or pay down further in the future as compared to a shorter-maturity bond. 
• Hedged or unhedged foreign currency risk (international). Some international managers attempt to reduce or eliminate currency exposure, typically by using derivative securities. When foreign currencies are performing well against the U.S. dollar, managers who hedge currencies may forgo gains related to currency appreciation. 

(Risk) Profiling 

Year-to-date through June 23, 2025, U.S. equities, as measured by the broad market Russell 3000 Index, advanced 2.7%. However, this masks some extreme bouts of volatility. Mid-February through early April, the index fell 19.3% (measured from the market peak on February 18, to its low on April 8). Off those lows, through June 23, the index advanced 21.6%.¹ One of the important ways LPL’s IMR team evaluates managers is relative to our expectations for a particular risk classification. For funds and managers under our coverage, we assign aggressive, moderate, and conservative risk classifications. From conservative investments, we generally expect less downside participation. From aggressive investments, we generally expect greater upside participation and realize they may be vulnerable in down markets. We assign a moderate risk rating to managers whose relative performance differences are expected to be moderate. 

Performance Outside of Expectations

The table below shows hypothetical performance of four fictional funds (two aggressive and two conservative) and a hypothetical market index. Fund A and B are performing according to our expectations, as they represent an aggressive fund outperforming in an up market and a conservative fund outperforming in a down market, respectively. Funds B and D, however, are performing outside of our expectations. Fund B failed to outperform in the up market, despite its aggressive risk classification. Despite its conservative classification, Fund D failed to outperform in the down market, which would be a concern for us even though it outperformed during the market rebound. 

Risk Classification and Investment Performance

Source: LPL Research (hypothetical performance)
Disclosure: This is a hypothetical example and is not representative of any specific investment. Your results may vary

When a fund is performing outside of our expectations, we seek to understand why, typically by examining its holdings and sources of returns, as well as asking the portfolio manager to justify the performance and positioning. This is akin to the student explaining the reasons for that disappointing “C” grade. It is up to us to determine whether the rationale for underperformance is appropriate and whether we want to take any action in response. 

Why Does It Matter? 

Markets sometimes go up and sometimes go down. Certain investment styles work well for a while and then go out of favor. An investor who only held investments of a certain type or certain risk profile may face the risk of only performing well in a certain market environment and struggling in other market environments. Instead, one approach is to pair together investments of different types, such that when one is underperforming, the other may be outperforming. Another approach is to tailor the investment style and risk profile of the investments to the preferences of the specific investor. Either way, we believe it is important to understand that different managers perform well in different environments. We also believe it is useful to set expectations for the portfolio and performance that are unique to the specific manager we are evaluating. 

^{1 All index numbers provided by FactSet}