By John Caspar
Bottom? up, pull your top down, get some momentum and buy a big hat. This is the language of investing? Well, no, not exactly ?but it? close. The terms ?ottom up? ?op down? ?omentum investing?and ?ig cap?are all taken from the language of investing, and refer specifically to the ?tyle?of management a portfolio manager is employing. You need to understand this language to ensure that you?e getting the investment management you need.
Reviewing Growth & Value Styles
Let? start with the big categories first. Generally speaking, we can place investment portfolio styles along a continuum of Growth and Value. Growth investment managers typically buy stocks trading at premiums to their current valuation levels with the expectation that rapid and sustained growth of the company will make the current premium seem like a bargain at some point in the future. ?ure, it seems expensive now, but just wait!? is the credo of Growth managers. Growth stocks can be quite volatile when the expectations regarding the future are incorrect. Better than expected results will usually be rewarded with a stock price spike, and the market will punish poorer-than-anticipated results. Growth managers are generally prepared to tolerate higher levels of volatility than Value managers, though, since they proceed based on the idea that their responsibility is to make as much money as possible for investors without being principally concerned with risk exposure. Value investment managers, on the other hand, think about volatility and risk a lot. They can? sleep, they can? eat?cht! Crazy, this risk is making them! Since investment managers on the Value side of the continuum generally feel that their job is to protect the capital while earning attractive returns, their whole investment style can best be described as bargain hunting. Value investors want a deal, period. They want a stock that? been beat up or overlooked by investors, but has a great near-term future. Value investors reason that buying cheap is like insurance. If you can buy a stock for less than its real value, it will have less price risk built in than buying a Growth stock. After all, the Value manager reasons, a Value stock only needs its value to be recognized for the investor to make money. A Growth stock needs its value to increase.
?op Down?and ?ottom Up?/STRONG> refer to the primary portfolio management process. If the portfolio manager makes individual security selections after first filtering for markets or sectors or themes that he or she thinks will offer the best opportunity for investment performance, we? say that manager is using a Top Down style. In Top Down investment management, the manager effectively deems being in the right market segment as the primary determinate of the portfolio mandate. A Top Down selection process is generally employed by Growth managers. Growth managers may also state that they use a blended style, with Top Down as an overlay prior to employing a Bottom Up stock selection process. That is, the Growth manager may identify three sectors in which he is seeking significant exposure because he thinks they?e the Next Big Thing. Then, having established his market or sector weightings for the portfolio, he will employ a Bottom Up analysis to select the individual stocks in those markets or sectors. A true Bottom Up manager would say that selecting the markets or sectors first and then using a ?ottom Up?style to pick the stocks is simply Top Down management, since ?ottom Up?implies by definition that the individual stocks are selected through fundamental analysis without regard to Top Down macro considerations. Semantics aside, it? the true Value folks that are the true Bottom Up-pers, since the very act of scrutinizing the landscape for individual bargain stocks defines both Bottom Up and Value investing.
Momentum Investing
As for ?omentum investing?and ?ig cap? well the first is a subset of Growth investing, and the second refers to the relative total dollar value of a company? outstanding capitalization. Momentum investors are mostly concerned with positive trends in the stock price itself, and a pattern of upward earnings revisions. Momentum investing is a particular risky growth style, however, since patterns tend to reverse themselves. Your prospectus and the ads don? say that past performance is no guarantee of future returns just for fun. And when the momentum runs out, you? better too. For a graphical description of this style in action, take a look at a NASDAQ market chart for the period 1999-2001. And good luck. Watch this space. We?l be talking more about these kind of delineations to style investing, why it? a critical component of risk management in today? markets, and what you need to consider for your own portfolio.
?2002 John Caspar
John Caspar is a Vice President and Investment Advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF. The views of the author do not necessarily reflect those of CIBC World Markets Inc. John is the money analyst for the CTV News at Five in Vancouver. His email is john.caspar@cibc.ca.
Bottom? up, pull your top down, get some momentum and buy a big hat. This is the language of investing? Well, no, not exactly ?but it? close. The terms ?ottom up? ?op down? ?omentum investing?and ?ig cap?are all taken from the language of investing, and refer specifically to the ?tyle?of management a portfolio manager is employing. You need to understand this language to ensure that you?e getting the investment management you need.
Reviewing Growth & Value Styles
Let? start with the big categories first. Generally speaking, we can place investment portfolio styles along a continuum of Growth and Value. Growth investment managers typically buy stocks trading at premiums to their current valuation levels with the expectation that rapid and sustained growth of the company will make the current premium seem like a bargain at some point in the future. ?ure, it seems expensive now, but just wait!? is the credo of Growth managers. Growth stocks can be quite volatile when the expectations regarding the future are incorrect. Better than expected results will usually be rewarded with a stock price spike, and the market will punish poorer-than-anticipated results. Growth managers are generally prepared to tolerate higher levels of volatility than Value managers, though, since they proceed based on the idea that their responsibility is to make as much money as possible for investors without being principally concerned with risk exposure. Value investment managers, on the other hand, think about volatility and risk a lot. They can? sleep, they can? eat?cht! Crazy, this risk is making them! Since investment managers on the Value side of the continuum generally feel that their job is to protect the capital while earning attractive returns, their whole investment style can best be described as bargain hunting. Value investors want a deal, period. They want a stock that? been beat up or overlooked by investors, but has a great near-term future. Value investors reason that buying cheap is like insurance. If you can buy a stock for less than its real value, it will have less price risk built in than buying a Growth stock. After all, the Value manager reasons, a Value stock only needs its value to be recognized for the investor to make money. A Growth stock needs its value to increase.
?op Down?and ?ottom Up?/STRONG> refer to the primary portfolio management process. If the portfolio manager makes individual security selections after first filtering for markets or sectors or themes that he or she thinks will offer the best opportunity for investment performance, we? say that manager is using a Top Down style. In Top Down investment management, the manager effectively deems being in the right market segment as the primary determinate of the portfolio mandate. A Top Down selection process is generally employed by Growth managers. Growth managers may also state that they use a blended style, with Top Down as an overlay prior to employing a Bottom Up stock selection process. That is, the Growth manager may identify three sectors in which he is seeking significant exposure because he thinks they?e the Next Big Thing. Then, having established his market or sector weightings for the portfolio, he will employ a Bottom Up analysis to select the individual stocks in those markets or sectors. A true Bottom Up manager would say that selecting the markets or sectors first and then using a ?ottom Up?style to pick the stocks is simply Top Down management, since ?ottom Up?implies by definition that the individual stocks are selected through fundamental analysis without regard to Top Down macro considerations. Semantics aside, it? the true Value folks that are the true Bottom Up-pers, since the very act of scrutinizing the landscape for individual bargain stocks defines both Bottom Up and Value investing.
Momentum Investing
As for ?omentum investing?and ?ig cap? well the first is a subset of Growth investing, and the second refers to the relative total dollar value of a company? outstanding capitalization. Momentum investors are mostly concerned with positive trends in the stock price itself, and a pattern of upward earnings revisions. Momentum investing is a particular risky growth style, however, since patterns tend to reverse themselves. Your prospectus and the ads don? say that past performance is no guarantee of future returns just for fun. And when the momentum runs out, you? better too. For a graphical description of this style in action, take a look at a NASDAQ market chart for the period 1999-2001. And good luck. Watch this space. We?l be talking more about these kind of delineations to style investing, why it? a critical component of risk management in today? markets, and what you need to consider for your own portfolio.
?2002 John Caspar
John Caspar is a Vice President and Investment Advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF. The views of the author do not necessarily reflect those of CIBC World Markets Inc. John is the money analyst for the CTV News at Five in Vancouver. His email is john.caspar@cibc.ca.
