Mutual fund management styles: Top-down, growth and value funds are managed differently

Money Digest, April, 2002

Mutual funds have 'styles of management'. This is simply the basis on which the fund is run. Here are a few common fund management styles:

Value. Here, the manager looks for undervalued stocks - stocks that are worth more than comparable stocks. The theory is that the market will eventually realize the value of these stocks and the price will go up.

Growth. The manager picks stocks that are expected to grow much faster than comparable stocks. They may or may not be value stocks.

Momentum. The manager buys stocks that are quickly rising - even if they are grossly overpriced. The basic idea is to buy and sell quickly.

Bottom-up. The manager picks stocks based on fundamental analysis of the company such as low price-to-earnings ratio, high book value etc.

Top-down. Here, the manager looks for sectors in the economy that are doing well (or are expected to do well) and then picks stocks within those sectors.

Sector rotation. Here, the top-down manager switches the investments to different sectors of the economy or industry based on analysis of economic and technical indicators.

When choosing a mutual fund, an investor may want to consider the management style (which is available from the fund's prospectus) before investing.