Active Mutual Fund Managers: Top-down or Bottom-up Stock Picking

Active mutual fund managers come in a variety of flavors. Two of the most common are top-down and bottom-up.

Top-down Mutual Fund Managers

Top-down managers seek opportunities based on a macro view, e.g. where are the world's geopolitical threats or how will innovation change an industry.

Bottom-up Mutual Fund Managers

Bottom-up investors take the opposite, micro view: they focus on individual companies and de-emphasize their ability to forecast macro trends.

The two styles are not mutually exclusive. Top-down investors must have some understanding of the companies they ultimately invest in. And bottom-up investors must pay heed to their investments' big picture headwinds and tailwinds.

Ultimately, whatever a manager's flavor, it's important for that he has an approach and sticks to it. As investors, our job is to identify a manager's talent and ensure that his process sticks to it.

In an April post, we highlighted Seafarer Overseas Growth & Income Fund (SIGIX), a fund we started investing in in December. Seafarer's takes a bottom-up approach. Their mandate is to identify great companies in the emerging markets.

Here is an excellent video on Seafarer's website that illustrates the bottom-up process. If you skip ahead to 14:27, portfolio manager Andrew Foster spends seven minutes unpacking his thinking on a recent portfolio addition, Vanguard International Semiconductor, a Taiwanese firm. You don't need to understand Vanguard's niche, or even what a semiconductor is, to appreciate how deeply Foster has thought through the industry, company, and investment.