investment strategy: Top-down or bottom-up investment? Check who uses which approach

NEW DELHI: When the stock market is trending up, a bottom-up approach to stock selection works best, while in a weak market a top-down approach is useful.

That’s a conclusion drawn by the foreign brokerage firm Bank of America-Merrill Lynch from a study of some 1,600 Indian mutual fund systems.

In a “bottom-up” approach, investors focus on individual companies rather than on the whole sector to which the company belongs or on the economy as a whole. The “top-down” approach works in the opposite direction.

In the top-down approach, investment decisions are based on macro parameters, such as the health of the economy or sector, which are then broken down to examine smaller components and their potential impact on a sector or whole. actions.

In the study, BofA-ML found that only 3 percent of the 1,600 equity funds managed to outperform Nifty in the first six months of 2018, while 6 percent of them outperformed on a relative in the past year and 16 percent in the past year. last three years.

“Sector allocation doesn’t matter in a strong market when it comes to stock picking. But that tends to add value in a weak market, ”the brokerage said.

Based on its cautious outlook for the Indian market, the brokerage said it may be time for Indian investors to focus more on “top down” investments.

Kalpen Parekh, chairman of DSP BlackRock Mutual Fund, said the recent underperformance of some of DSP’s programs was due to their under-ownership of export-oriented IT and pharmaceutical stocks.

This somewhat validates the argument that sector preferences have a role to play in a weak market.

BofA-ML is currently overweight Indian discretionary, financials and industrials and underweight healthcare and IT. He also reduced his stance to neutral on staples.

According to a study by Motilal Oswal Securities, at the end of May, technology (16 funds under-held), consumption (15 funds under-held), private banks (14 funds under-held), oil and gas (14 funds under-held), -owned) and utilities (13 under-held funds) were among the sectors where domestic mutual funds were underweight by at least 100 basis points compared to the weights of these sectors in the BSE200 index.

“On a monthly basis, the weights of financials, technology, consumer and oil stocks increased, while those of capital goods, health, automotive, metals, infrastructure, cement, services utilities, telecommunications, real estate and chemicals have moderated, ”Motilal Oswal Securities said in a note.