Wednesday, 08 June 2016 - 20:00

 

Charts

Seed Weekly - Different Investment Manager Styles

Seed Investments constructs and manages investment portfolios as a multi-manager. This means that in building a portfolio, we may look to combine various underlying asset classes and various types of funds into one portfolio. The rationale is simple - there are numerous types of investment styles and strategies that managers employ and the reality is that there is no one single style or strategy that has the corner on the market. Each one has merits and drawbacks.

Tawanda discussed passive versus active three weeks back (click to view article) and our conclusion is that there is a place for both of these major investment styles into a portfolio. At the same time we recognise the merits of including underlying managers with various investment styles into a portfolio.

Beside the active versus passive debate, other investment styles that active investment managers employ can be described as:

• Top down
• Bottom up
• Value investing
• contrarian
• quality
• Growth investing
• Momentum

A top down investment strategy means that the investment manager places a high emphasis on macro-economic factors and forecasts. The manager may spend up to 50% or sometime even 70% of their time trying to understand aspects such the direction of interest rates, debt levels in an economy, commodity supply and demand, foreign investment flows, investor sentiment etc. and how these impact on the consumer on various types of company earnings.

A bottom up investment strategy pays more attention to valuations of individual businesses and very little to no emphasis on macro-economic factors. The most famous bottom up investment manager is Warren Buffett, who says “The key attitude of managers that adopt this investment strategy is their view that no one can accurately and consistently predict macro events and so time is best spent analysing companies at a more micro level".

A value investment management style is one that leans to searching for an investment that on some analysis trade at a price below their assessment of intrinsic value. The key premise is that for a variety of reasons, but typically when there is a preponderance of negative news, the price of an investment trades below what the investment is truly worth. It is these type of opportunities that value investors will seek out, looking to profit as prices revert closer to intrinsic value.

A contrarian investment style is often a more extreme version of a value style. These managers are attracted to companies that are deeply out of favour with the investment community, or where investment holding companies trade at large discounts.

Often in contrast to a value investor, a growth biased investment style is one that places a higher emphasis on company earnings and specifically on those companies that are able to grow their earnings at levels at a higher rate than competitors. The key premise with this strategy is that discounted future earnings determine the current value and that those businesses that are able to grow ahead of their competitors or the overall market will reward shareholders with higher company value over time.

A more extreme version of a growth strategy is a momentum investment strategy. This is a strategy that focuses on recent price movement of shares, investing into shares that have moved up ahead of competitors. History shows that price momentum has a high degree of repeatability.

Each one of these investment strategies and styles has both merits and drawbacks. Often investment managers blend investment styles, but at the same time there is typically a dominant style that the investment manager fashions their philosophy and process around.

Investment styles themselves can move in and out of “fashion”. For example over the last few years, momentum and growth strategies have outperformed against value strategies. This can be seen in the chart below, where the momentum style of global markets is reflected against the value style. This has not always been the case and so investment managers with a strong value or contrarian bias have typically struggled versus their peers. Being in a position to blend various styles and strategies is therefore advantageous to investors.

Chart 1: MSCI Growth versus Value Indices

Kind regards,

Ian de Lange

View Disclaimer

Tel +27 21 914 4966
Fax +27 21 914 4912
Email info@seedinvestments.co.za

www.seedinvestments.co.za

Wed, 08 Jun 2016

Top News

Index Summary

Stock Exchange News Service

© 2016 Sharenet (Pty) Ltd
Box 30584, Tokai, Cape Town, South Africa
Tel +27 21 700 4800

**Top 5 listings shown.

The Sharenet Daily is provided free of charge by Sharenet
to clients who have registered on our site and elected to receive it.

If you have problems taking yourself off this list please forward a full copy of this email to support@sharenet.co.za

This email was sent to {email}

Click here if you wish to unsubscribe from The Sharenet Daily...