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 may complement each other. Depending on the economic cycle, some styles may be more successful. Since it's difficult to predict market movement, it is wise to hold mutual funds that are managed according to different approaches.


In a top-down approach, macro-economic analysis is used to manage funds. The goal is to identify those industries or countries that are likely to offer the best returns. According to this approach, general growth in an industry or country will have a strong impact on equity growth. For instance, the fund manager would advocate buying shares in a company operating in a growth sector or in a growing economy, and not necessarily in a company which, on its own, seems better, but is operating in an unfavourable economic environment.


In the bottom-up approach, the focus is on profitable firms, with little concern for the industries in which they operate. Bottom-up style fund managers believe that a quality firm, regardless of its sector of activity, will generate better long-term returns.


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. These equities are expected to rise in value due 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 situation of the target companies.


Growth managers are prepared to pay a higher price now for earnings in the future, 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 may be high in relation to posted earnings. Managers who favour this approach seek a stable environment in which already successful companies continue to prosper.


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 the equities usually are sold at the least sign of a growth slowdown.

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, it's important to understand that each style when properly applied will produce good results at different times in the economic cycle.

If you're unsure how to integrate these different management styles into your portfolio, talk to your National Bank adviser.

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