Investment styles Flashcards
Describe momentum investing
- Identify trend
- Trend accelerating
- Sell before trend ends
- Ignores fundamentals
- Generally short term
Describe contrarian investing.
- Consensus usually wrong
- Returns from going against the herd
- Positive when outlook negative
- Price less than intrinsic value
- Generally long term
Describe value investing.
- Indentifies undervalued stocks
- Compared to their fundamental value
- Market is inefficient
- Believes price will return to fair value
Describe the four ways ETFs can replicate an index.
- Full replication - buys all stocks in index in correct weightings
- Stratified sampling - buys selection of stocks in index
- Optimisation - buys computerised model of index
- Synthetic - uses derivatives
Describe GAARP investing.
- Companies with long term sustainable advantage
- Worth paying a premium price
- Avoids excessive valuations
- Mix of value and growth
What are the benefits and drawbacks of active fund management?
Benefits:
- Informed investment decisions based on sound analysis.
- Possibility of higher returns against the index.
- Ability to take defensive measures to protect the fund’s value in the event of market downturns.
- Certain strategies (i.e. absolute return, hedge fund) not readily available as passive options.
Drawbacks:
- Higher fees and charges
- Empirically, unlikely to overperform once fees taken into account.
- Investment style adopted may underperform in certain market conditions.
What are the benefits and drawbacks of passive fund management?
Benefits:
- Tend to be cheaper than active funds.
- No risk of significantly underperforming the index.
- Removes reliance on fund manager skill.
Drawbacks:
- Investors must be satisifed with the performance of the index.
- Won’t be able to go on the defensive in a market downturn.
- Index funds not able to take tactical decisions or use hedging.
