CHOOSE DIFFERENT MANAGEMENT STYLES

Before we discuss different management styles, it is essential to understand that there is no right or wrong management style. A mix of management styles within a portfolio often complement each other, and certain styles may do better than others, depending on the economic cycle. Since it is difficult to predict market movements, it is wise to hold mutual funds that are managed according to different approaches.

TOP-DOWN APPROACH

In a top-down approach, funds are managed primarily using macro-economic analyses. The goal is to identify those sectors or countries that are likely to offer the best returns. Adherents of this approach consider that the general growth of a sector or country will have a strong impact on equity growth. They would advocate buying shares in a company operating in a growth sector or economy, rather than in a company which, on its own, seems better, but is operating in an unfavourable environment.

BOTTOM-UP APPROACH

With a bottom-up approach, the focus is on companies, with little concern about the industry in which they operate. In contrast with the previous approach, bottom-up managers believe that a firm with a definite quality will generate a better return in the long term, regardless of what sector it is in.

VALUE APPROACH  

Value-oriented managers look for companies whose share value they believe is not yet representative of the true value of the company. In other words, companies whose potential has not been "discovered" by the market, and whose value has not yet translated into a higher share price, but is expected to owing to their competitive position, superior technology or exceptional management team. Managers who prefer this style look for dynamic environments where there are frequent changes in either the economy or the particular situation of the target companies.

GROWTH APPROACH  

Growth managers are prepared to pay a higher price for future earnings, because the growth outlook for the equity is above average. In contrast with the value approach, the company's growth potential is established, which means that the share price is relatively higher in relation to posted earnings. Managers who favour this approach seek a stable environment in which already successful companies continue to prosper.

MOMENTUM APPROACH  

This management style is designed to tap into an equity's upward momentum. Momentum managers look for companies that not only post earnings growth, but also a growth rate that exceeds market expectations. They want to take advantage of rising stock prices. This is a particularly aggressive management style, because at the least sign of a slowdown in growth, the equities are sold.

How to choose?
Variants exist within any one of these management styles and some managers even opt for a mixed approach that combines elements of each style. In the final analysis, the important thing is to understand that, when properly applied, each style will produce good results at different times in the economic cycle.

If you're unsure how to integrate these different approaches into managing your portfolio, talk to your National Bank advisor.