- Some managers specialize in selecting individual stocks – known as stock picking.
- Managers who pick stocks typically build a portfolio by picking stocks or other securities – they are said to be building a portfolio from the bottom up.
- Managers who decide on exposures to sectors or regions and construct portfolios accordingly are said to take a top-down approach.
The investment industry has its own language, but its code is relatively easy to decipher with a few basic terms.
Here are a few that you might find useful:
Managers who spend a lot of time researching individual stocks and selecting them based on their knowledge of the company and its potential are called stock pickers. Stock pickers are often successful individual managers.
High conviction managers
Some active managers make investment decisions that are very different from the index against which their returns are compared.
Managers who invest heavily in a small selection of stocks and whose portfolios are very different from that of the benchmark are called high conviction investors.
Investing with a high-conviction manager can give you good performance above the market, but it can also result in performance well below the market if the manager’s calls on where to invest don’t work.
Aware of the benchmark
Some managers take small bets relative to the benchmark – this means they invest primarily in the same stocks or other securities that are represented in the benchmark with slightly higher or lower weightings in each .
Managers whose portfolios are very similar to those of the benchmark are called benchmark knowing and they can always outperform the market.
In the investment industry, a manager can be referred to negatively as a benchmark hugger or hidden index tracker if their portfolio is very similar to their benchmark.
Managers who present themselves as stock pickers are often also what are called bottom-up investors. They choose each stock on its merits and do not consider whether it belongs to a particular sector, industry or region.
Bottom-up managers who run asset allocation funds let their choice of stocks, bonds or listed assets dictate the fund’s asset allocation.
Some managers allocate a certain percentage of their portfolios to different sectors, parts of the economy, or regions that they think will do well. They then select stocks within these sectors. These managers are called top-down managers.
Managers who strive to avoid losing money on the investments they have made are said to manage downside risk.
Managers may follow a particular investment or style if their investment strategy is broadly consistent with that which has been identified as an investment style.
Managers who follow a particular style can outperform the market. But it can also lead a manager to underperform the market for periods – sometimes long periods – when an investment style is not popular.
This article first appeared on SmartAboutMoney.co.zaan initiative of the Association for Savings and Investments of South Africa (ASISA).