Theory would favor a combination of big capitalization, passive and value. Of course one could almost get that when investing in an important Index like S&P 500, EURO STOXX or the like.
The style is determined by
- the temper and the beliefs of the investor.
- some personal or social traits (investor profile) such as age, gender, income, wealth, family, tax situation...
- generally, its financial return / risk objectives, assuming they are precisely set and fully rational.
Active vs. Passive Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well. Passive investors, on the other hand, feel that simply investing in a market index fund may produce potentially higher long-term results. The majority of mutual funds underperform market indexes.
Active investors feel that the small-cap market is less efficient since smaller companies are not followed as closely as larger blue-chip firms. A less efficient market should favor active stock selection. The core-/satellite concept combines a passive style in efficient market and an active Style in less efficient markets.
Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their business cycle. A value investor is primarily attracted by asset-oriented stocks with low prices compared to underlying book, replacement, or liquidation values. There is also a diversification effect: Returns on growth stocks and value stocks are not highly correlated. By diversifying between growth and value, investors can help manage risk and still have high long-term return potential.
Small Cap vs. Large Cap. Some investors use the size of a company as the basis for investing. Studies of stock returns going back to 1925 have suggested that "smaller is better." On average, the highest returns have come from stocks with the lowest market capitalization (common shares outstanding times share price). But since these returns tend to run in cycles, there have been long periods when large-cap stocks have outperformed smaller stocks. Also, early on, small cap stocks had bigger premiums and were more expensive to buy and sell, but isn't easily captured in historical analysis, and in reality likely skewed total return for investors.
Small-cap stocks also have higher price volatility, which translates into higher risk. Some investors choose the middle ground and invest in mid-cap stocks with market capitalizations between $500 million and $8 billion — seeking a tradeoff between volatility and return. In so doing, they give up the potential return of small-cap stocks.
Mostly taken from www.axaonline.com/rs/3p/sp/5044.html#what's