Active Fund Management Styles

Question 1

Two common active management styles

Answer 1

Top down and bottom up

Question 2

Describe top down fund management

Answer 2

• Determine asset allocation
• Choose sector weightings
• Select stock
• Top down is an ongoing and dynamic process
• Benchmark aware

Question 3

Describe bottom up fund management

Answer 3

• Pays no attention to benchmarks
• Stock selected purely on basis of own criteria
• Usually dependent on style or approach of fund manager e.g. value, growth at reasonable price, momentum and contrarianism

Question 4

Describe a ‘value’ style of investing

Answer 4

Buy & hold strategy to earn higher return than market average, buying stocks that appear under priced

Question 5

Describe a ‘growth at a reasonable price’ approach to investing

Answer 5

Find companies with long term sustainable advantages

Question 6

Describe a ‘momentum’ investment style

Answer 6

Uses analysis to be ahead of latest swing in opinions e.g. sector rotation

Aims to capitalise on the continuance of existing trends in the market

Question 7

Describe a ‘contrarianism’ investment approach

Answer 7

High returns can be achieved by going against the trends (e.g. hedge funds)

Question 8

Value tests used in value investing

Answer 8

• Adequate size
• Strong financial condition
• Earnings stability
• Dividend record
• Earnings growth
• Moderate PE ratio

Question 9

What features should a company have to be considered a growth stock?

Answer 9

• Positive growth rate in EPS in at least 4 of the last 5 years
• A low PE ratio relative to the growth rate
• An optimistic chairman’s statement in the report and accounts
• Strong liquidity
• Competitive advantage

Question 10

What is blend investing?

Answer 10

Combines value and growth approaches