| Style investment is an important branch of portfolio investment. Many empirical researches indicate that there exists market anomaly that contradicts with the efficient market hypothesis. In fact style investment is an application of the market anomaly strategy in the practice of investment. It is capital institutionalization that drives style investment to be one of the mainstream investment modes in a mature stock market. This paper focuses on investigating whether style investment is applicable, if yes, how to apply, in the emergent and transforming Shanghai and Shenzhen Stock Market where traditional insider trading becomes ineffective and institutional investors with mutual funds are actively looking for new investment methods. From current style investment practice in the U.S, fund portfolio holding has distinguished features and can stick to a specified fund style. However, for most rotation funds, the resulted rotation is far from ideal for the market, which seems to imply the difficulties of fund style rotation. For Taiwan Stock Market that is neither new nor mature, style investment seems to be just a start. Fund style is not dramatic, and cannot maintain the same style for, say, three years. Style investment is therefore still under developing process in Taiwan, and has not reached to relatively mature and steady stage. In Shanghai and Shenzhen's Stock Market, the fund style essentially has not changed much although difference exists among fund contracts in terms of investing methodologies and style representations. During the same time period, most fund portfolio holdings do not differ much, neither do their styles, due to the herding effect. More seriously, most funds are rotations funds, chasing for superior style, which has the risk of exaggerating the effect of chasing-up and killing-down, and thus is not helpful in establishing a steady market. The reason behind this phenomenon is lack of confidence on style investment and investors being too shortsightedness. Therefore, introducing style investment is very important in China.Using our sample data of Shanghai and Shenzhen Stock Market from May 1994 to April 2004, we can see clearly the Book-to-market Anomaly and Size Anomaly vio various performance evaluation metrics such as benefit cost ratio only, Jense index, Treynor index, and Sharp index, etc. The rate of return with high B/P is higher than those with lower B/P, and small cap stocks perform better than large cap stocks. Moreover, high B/P and small cap stocks perform better than market indices in the same period. There are economic implications of the rate of return differences. However, the hypothesis of EP Anomaly is not valid to Shanghai and Shenzhen's Stock market. Although EP Anomaly exists for non-loss stock, some phenomenon that contradicts with EP Anomaly coexists, that is, more loss leads to more profits. A further study indicates that the influence of net B/P, size, and EP to the rate of returns differs from each other. Net B/P has the most significant effect for the rate of returns, next goes to size, and EP is the last. After controlling the variables of net B/P and size, EP no longer shows significant influence. This shows that EP is not an independent variable and its significance is only the result of the other two. Hence, the strategy of high EP is very difficult to become an effective style investment strategy in China. To find the reason for net B/P Anomaly and size Anomaly, we find that factors such as risk and liquidity are not adequate to explain value premium. One possible reason for value premium is the operational distress of value stocks, to which the market has overacted. According the related research in behavioral finance, this overreaction is difficult to disappear in a short time, which seems to suggest that value premium will continue to exist. Size Anomaly can hardly be explained by factors such as risk, neglected effect, and distress. Liquidity and market manipulation may partially explain value premium for small companies. But li...
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