Manager Investment Styles Examined
Growth vs. Value
Portfolio managers can often be identified by their investment style. These styles are commonly categorized as growth, value, and often a hybrid of the two.
The value manager looks for inexpensive stocks that are often out of favor. Many stocks that fit this criterion are cyclical stocks at the end of their business cycle. Managers who follow a value approach search for assets that are undervalued or where the manager feels the market may not be recognizing the full potential for that company or industry. The strategy is to buy companies when prices are depressed and sell them when their market value rises.
Growth managers look for companies with a track record of rapid growth in sales and earnings and the potential for more of the same. The belief is that the future growth of the company will, in a relatively short time frame, justify its stock's current high price and provide even higher prices in the future. Microsoft was an example of a growth stock during the late 1980s and ‘90s.
Some investment managers choose not to commit themselves to any one investment style by using aspects of both during different phases of the economic cycles. Returns on growth stocks and value stocks are not highly correlated. By diversifying between growth and value managers, investors can help manage investment risk and still have high long-term return potential.
Top-Down vs. Bottom-Up
Managers who use a top-down approach will first analyze the economy and the market outlook and then select markets and industries that they feel will outperform. These managers are more concerned with macro-economic variables than individual companies.
Fund managers who follow a bottom-up management style start by selecting promising individual companies. Only stocks or bonds that meet these managers' investment criteria are purchased. If they can't find what they want at a price they are willing to pay, they will hold cash until they do.
Some fund managers combine top-down and bottom-up styles by determining not only the countries and industries in which to invest but also the individual companies.
Technical vs. Fundamental Analysis
Some portfolio managers look at the fundamentals of individual stocks, while others invest based on technical analysis. Fundamentalists spend time poring over annual reports and visiting companies in an effort to glean information about a company's financial health. Technical analysts pore over charts of stock prices and economic data in an attempt to divine future trends. Technical analysis has seen a resurgence in use due to the prevalence of accurate real time market information.
This technique used commonly by fixed income managers involves forecasting and analyzing the direction of the change in interest rates, the degree of the change across maturities and the timing of the change. Interest rate predictions have far-reaching effects, but can also directly impact prices of financial instruments like bonds. A correct forecast on interest rates can have a significant effect on a portfolio’s incremental returns.
Many experts encourage diversification in many aspects including investment style, geographic scope, industry and asset class. Financial services professionals, including financial advisors and investment brokers, have been specifically trained to address and plan for all the considerations above. Please consult a financial professional in your area to assist you with constructing an appropriate portfolio mix.