“Investment style is incredibly important because of the way that investing works. Both risk and return are connected to style, you can optimize a blend of styles for diversification, balancing reward and risk.”
The criteria that mutual fund managers use to select their assets vary widely according to the individual manager. So when choosing a fund, you should look closely at the manager’s investment style to make sure it fits your risk-reward profile.
“Investment style is incredibly important because of the way that investing works,” says Chris Geczy, director of The Wharton School’s wealth management program at the University of Pennsylvania.
“Both risk and return are connected to style. According to current practice portfolio theory, you can optimize a blend of styles for diversification, balancing reward and risk.”
Here’s a look at a half-dozen common investment strategies among fund managers.
- Top-down investing
- Bottom-up investing
- Fundamental analysis
- Technical analysis
- Contrarian investing
- Dividend investing
Top-down or bottom-up investing
Top-down investing strategies involve choosing assets based on a big theme.
For example, if a fund manager anticipates that the economy will grow sharply, he or she might buy stocks across the board. Or the manager might just buy stocks in particular economic sectors, such as industrial and high technology, which tend to outperform when the economy is strong.