Our Recommended Broker

Get $50 in free trades.
Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max FAQs
Home
Disclaimer
Learning Topics
Contact Us
FAQ Archive

What do mutual fund managers mean when they say they're using a "bottom-up" or a "top-down" investment style?

Investment style means the approach the manager uses to choose investments.

Some managers begin the task of finding investments by looking at the financial, management and market strengths and weaknesses of individual companies. They focus squarely on the company and give only secondary regard to industry issues and the overall economy. This is called a bottom-up approach. They focus on the company's bottom line, then work their way up to the industry in which the company operates, and then to the broader economy.

Other managers work the opposite way. They start by looking at the big picture, such as which sectors of the economy they believe will generate above-average returns. Then they look at particular companies or investments. This is called a top-down approach.

Neither the bottom-up nor the top-down approaches adequately describe what a manager looks for in the economy, an industry sector or an individual company. It also doesn't describe the different styles used by equity, fixed-income and asset allocation managers.

Understanding managers' styles is important. Some styles are potentially riskier than others and may perform differently under certain conditions. Others involve more trading, which can add to a fund's management costs. Without knowing what style a manager uses, you don't really know if that fund is suitable for you.