Style radiation

The spread of investment insights may be visualized as waves radiating outwards in concentric circles from pebbles falling into water. The source of these investment pebbles is the United States. The dynamic force behind the rise of post-World War II equity markets has been academic research coming out of US universities. The availability of cheap computer time, cheap graduate student labor and creative senior professors (six of whom have now received the Nobel Prize in Economics) has contributed to the development of concepts like the capital asset pricing model, the efficient market hypothesis and performance measurement, as well as the growth of derivatives markets.

Not every investment technique is appropriate at every place around the world at the same time. Ideas radiate, interfere with one another and produce new patterns, then reach the periphery at the same time as new stimuli occur at the origin. Technology and communications accelerate the speed of ideas radiating outwards until, finally, the impact reaches emerging markets. As the process is repeated, it is accelerated further.

We can divide the investment world into three parts the United States, developed (ex-US) markets and emerging markets. Most US institutional investors have dedicated teams covering each of these segments. In some cases, they have specialized teams within each team segmented by geography.

The investment world was reshaped immediately after World War II. In fact, if we go back farther, we can gauge the present long-wave bull market from the Battle of Midway in 1942. If we look at equity styles since then, we see that there have been two
major waves, each lasting one or two decades. And a third may have begun.