Facts about funds
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Active management strategies
There is a range of investment strategies and styles to be found amongst active managers. These include:
Top-down
The investment manager buys, holds and sells shares or bonds based primarily on the analysis of broad economic trends. This could be in relation to a region (for example, China), a sector (such as oil and gas), or a theme (for example, a higher demand for green energy). This process is also known as Asset Allocation.
Bottom-up or stockpicking
The portfolio holdings are chosen on the basis of in-depth analysis of individual companies. This may lead to a focus on a certain sector or country.
Stockpickers often visit companies and study their financial statements in detail. They assess a range of features, including the strength of companies’ balance sheets, cashflow, future profit growth, their potential to pay or increase their dividend and how strong they are compared to their competitors in the market.
Strategies within this definition include value investing and growth investing, and are typically used in managing equity funds.
Value investing
The choice of shares will be based on research into companies’ long term future profitability and value. It requires an in-depth understanding of the business, the market, and economy in which it operates. The value of its assets, the competency of the management, and its debt, cashflows and/or growth potential, are all factors to be considered.
The value investment manager buys shares when the market price is lower than what is, in their view, the true value of the company going forward.
Growth investing
This involves similar analysis to value investing, but with the focus on companies which are growing in size and profitability.
Ethical investing
The aim is to make money by investing in companies which fulfil certain ethical criteria or which have an environmental or green focus. Funds can either avoid companies which operate in particular areas, such as defence, or actively seek out companies that aim to improve matters, such as cleaning up the environment. You can find this information in a fund's prospectus
See our Ethical investing guide for more information
Funds of funds
The investment manager invests in other authorised funds (rather than directly in company shares, bonds or property) to achieve the fund objectives. In this way, the fund can give investors access to funds, investment managers and strategies depending on the particular investment objective of the fund of funds.
Lifestyle or target date
Some funds are designed to deliver a return over a certain time period. This particularly suits those planning for retirement. Investment managers will adapt their strategy over the life of a fund. This typically involves moving from riskier asset classes to less risky assets at the time their investors are due to cash-in approaches.
Absolute return
The strategic aim is to deliver absolute (ie. more than zero) returns in any market conditions. How investment managers try to meet this objective can vary from fund to fund. They may use any asset class and can use derivatives to smooth out the ups and downs of the stockmarket and so get a steady return from one year to the next. Some absolute return funds aim to generate a return which is a few percentage points greater than the interest rate set by the Bank of England.