COMMON INVESTMENT STRATEGIES FOR FUND MANAGERS

We might have heard about a lot of strategies of fund managers but it is difficult for a lay man to get a perfect picture of what it is. So here are the common investment strategies of fund managers for a common man to understand.

Top-Down Investment

When the economy is doing well or growing very well the fund manager might buy the stocks which he/she thinks will do will when economy is performing well. For example any industrial sector or transport sector sectors do well during progress of the economy. Hence such stocks are bought. On the contrary if the economy is not doing good such stocks are sold. This is the Top Down approach.

Top Down = Good market = Buy stocks

Or

Top Down = Bad market= Sell stocks

Bottom-Up Investment

Unlike the top down investment here the manager buys or sells the stock of the company based on the company’s progress and not the economy.

Bottom Up = Progressive Company = Buy Stock

Or

Bottom Up = Regressive Company = Sell Stock

Fundamental Analysis

Here the manager scrutinises a company’s management by meeting various people associated with the company. They also analyse their market and key for potential growth. They also use analyse financial statements like PE Ratio, ROE Ratio, etc and arrive at a decision based on combination of all these factors.

Fundamental Analysis = Company analysis = Potential Growth = Buy

Or

Fundamental Analysis = Company analysis = No growth/ loss = Sell

Technical Analysis

Here also the company is scrutinised but just through technical analysis like charting or focussing on their history trading pattern or by predicting a direction for future share price or by analysing the asset value of the company.

Technical Analysis = Charting = Growth trend/Pattern = Buy

Or

Technical Analysis = Charting = No growth trend/ Pattern = Sell

Contrarian Investing

Here they choose assets that are out of favour. It means buying assets that are underpriced relative to their full or intrinsic value while the rest of the market is selling. They buy these stocks with the expectation that the gap between share price and intrinsic value of the stock will converge at some future point.

Contrarian Investing = Rest of the Market Selling the Stock = Buy the Underpriced Stock

Dividend Investing

Dividend funds buy stock with good record of earnings and dividends. They buy such stocks to take advantage of the steady payments and the opportunity to reinvest dividends to purchase additional shares of the stock. Most of such companies are considered financially stable and hence the stock prices of such companies may steadily increase over a period of time while the shareholders enjoy periodic dividends.

Dividend Investing = Companies with high yield of earnings and dividend = Buy

These were a few common strategies followed by the fund managers in order to buy or sell stocks. These managers could follow a combination of all the above strategies to buy different kinds of stock or just stick to one style based on their experiences and exposure. However it is always advisable to follow a balanced way to gain higher profits and to play safe.

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