Holdings-Based Style Analysis

A fund calls itself a "large-cap value" fund in its prospectus. Is it actually one? You could try to answer that by regressing the fund's historical returns against value and growth index returns and seeing which one it correlates with — that's returns-based style analysis. Or you could just open the fund's holdings list, look up every stock's market cap and value/growth score, and average them, weighted by position size. That second approach is holdings-based style analysis, and it answers a more direct question: not "does this fund behave like a value fund," but "does this fund actually own value stocks."

Building the score

For each holding, pull a characteristic, most commonly a value/growth score derived from book-to-price, earnings yield, or a vendor's composite, and a size measure derived from market capitalization. The portfolio's style score is the weight-averaged sum:

$$\text{Portfolio Style} = \sum_i w_i \times \text{Style}_i$$

In words: multiply each holding's individual style score by how much of the portfolio it represents, and add across every holding. A fund entirely in stocks with a value score of 0.8 gets a portfolio score of 0.8; a fund split evenly between a strong value name (0.8) and a strong growth name (-0.6) lands near the middle, at 0.1, even though neither individual holding looks anything like "the middle."

Worked example

A fund holds 60% in Stock A (value score 0.7) and 40% in Stock B (value score -0.3, i.e. mildly growth-tilted).

1. Stock A contribution. $0.60 \times 0.7 = 0.42$.
2. Stock B contribution. $0.40 \times (-0.3) = -0.12$.
3. Portfolio style score. $0.42 + (-0.12) = 0.30$, placing the fund solidly on the value side of the box, even though 40% of its assets sit in a growth-leaning name.

Run the same weighted average on market cap and the fund lands somewhere on the small-to-large axis too, together placing it in one of the nine boxes of a standard style grid.

What this means in practice

Fund databases and consultants use holdings-based analysis to check whether a fund's prospectus label matches its actual portfolio, a mismatch is called style drift, and it matters because pension plans and allocators often mandate exposure to a specific style box and would be violating their own guidelines by holding a fund that has quietly drifted. Because it uses the fund's actual current holdings, holdings-based analysis reacts to a portfolio change immediately, unlike returns-based analysis, which needs enough subsequent return history to detect the shift statistically.