Asset Class Strategies

There are many strategies for "beating the market". "Bottom-up" strategies focus on the valuations of individual securities and ignore changes in market valuations and the economy. "Top-down" strategies involve changing the commitment to various market segments within asset classes. "Technical Analysis" and other quantitative strategies focus exclusively on the historical patterns of price and return movements, independent of other factors.

Security Selection and "Bottom-Up" Strategies

Classic "value" and "growth" investors focus almost exclusively on security selection. They believe that it is impossible to catch swings in market sentiment and spend their time analyzing and buying good securities. They believe that good security selection will overpower the "noise" of market movements in the longer term.

Sector Rotation

"Top-down" or "sector rotation" strategies focus on changing the allocation of equity or bond portfolios depending on the outlook for each sector, based on "big picture" economic, political and business factors. Rather than assess individual securities, the sector rotator tries to catch major changes in "macro" variables i.e. the growth rate of the economy.

An equity manager might emphasize the "cyclical stocks," those stocks that show large changes in earnings because of the economic cycle (early in an economic recovery). As the recovery progressed, the large earning increases of these cyclical stocks would be recognized by the market, and their stock prices would increase. A bond manager would lower the term of his bond portfolio if higher interest rates were expected. In a poor economy, with weak corporate profits, a bond manager would lower the portfolio exposure to corporate bonds, as their credit worthiness would deteriorate. An equity manager expecting higher interest rates might sell utility and bank stocks, as the price of these "income stocks" are heavily influenced by the movements of interest rates.

Technical and Quantitative Strategies

Technical Analysis and quantitative techniques focus exclusively on the patterns of price and return movements of individual securities, sectors, and even asset classes. A portfolio manager using technical analysis might decide to sell a stock solely upon its recent price movements, independent of the fundamental outlook for the stock. This extends to markets as well, the "asset allocation" specialist would perhaps lower the equity weight in a portfolio to zero, based upon quantitative relationships compared to historical norms.

Market Timing Strategies

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Equity Management Styles

Bond Management Strategies

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