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Mutual Funds

Investment Management Styles

A mutual fund's investment objective is determined by the mutual fund company. However, the investment management style is determined by the fund manager or the team of fund managers.

With equity funds, there are three common management styles: Top Down, Bottom Up and Blend.

With fixed income funds, there are two different investment management styles: Spread Trader and Interest Rate Anticipator.

Top-Down

The fund manager (or team of managers) takes a look at the "big picture," analyzes general economic conditions, and then determines which industries/sectors/countries should benefit from an improved economy.

After finding the industries/sectors/countries, the manager(s) then select the individual companies within those industries/sectors/countries that meet the mutual fund's investment objectives.

With the Top Down approach, the fund managers limit the time they spend analyzing individual companies.

Bottom-Up

This is a very different style from the Top Down approach, as it involves identifying companies regardless of economic or industry climate. The fund manager(s) focus primarily on buying individual companies/businesses that meet the mutual fund's investment objectives.

Blend

Some mutual fund managers' investment management styles use both a Top Down and Bottom Up investment approach. Usually the Top Down investment style is used to determine the industry, and the Bottom Up style is used to determine the securities to buy within the industry.

The following two styles are those most commonly used by fixed income mutual fund managers:

Spread Trader

The objective of a Spread Trader is to improve the bond portfolio yield without increasing the risk level. Following this style, the investment manager will typically switch from one bond to another to take advantage of aberrations occurring in the bond market.

Spread Traders tend to be very active bond traders, constantly analyzing credit risk, historical yield relationships between bonds, and creditworthiness while keeping a close eye on the yield curve.

Interest Rate Anticipator

The objective of an Interest Rate Anticipator is to maximize the return of the bond portfolio. The manager analyzes and forecasts the trend of interest rates and then establishes an average term to maturity for the fixed income portfolio.

This style does not take into account the credit risk of the bond and, therefore, the investment manager typically will invest in highest rated bonds. For example, if the forecast is for lower interest rates, the manager would most likely invest in the long end of the bond market. Interest Rate Anticipators are not active bond traders.



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