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1 Transcript

2 Investment styles

Host
Welcome to this Franklin Templeton Academy podcast in our series on the
Must Know Aspects of Equity Investing. In this series, we’ll be joined by
Academy experts as we examine investing in equity funds.
In today’s episode, we‘ll be exploring different equity fund management
styles. The key questions for today are:
• Why is it important for investors to understand different equity fund
management styles?
• What are these different investment styles and how do they affect risks
and returns?
Let’s hear what our Academy expert has to say.
Hello and thank you for joining us today. While millions of people invest in
equity mutual funds, many investors may not be aware that different fund
managers have different investment styles. Can you tell us why it matters
and why this is something investors should be aware of?
Academy expert
Investment style is really important because it impacts a fund’s asset
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allocation, which has implications for both risks and returns. It determines
how fund managers build and diversify their portfolios, and achieve a
balance between risks and rewards. There are thousands of funds available
in the market today. Investors who understand investment styles may be
better equipped to pick the funds best suited to their needs.
Host
Right, it’s about knowing how the captain thinks, before you board the ship?
Academy expert
Yes exactly!
Host
So can you tell us what these different investing styles are?
Academy expert
Let’s begin with the top down vs the bottom up approach.
Top down investing involves looking first at the big picture, the economy at
a macro level, GDP, inflation rates, interest rates, and so on, and then
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looking into components. For example, if there is an expectation of markets Academy expert
booming, the manager may opt to buy specific stocks that will outperform
Yes. There are also active or passive investment styles.
the general markets during this boom period. If there is a slow-down
or slump expected, the manager may sell more risky stocks, and take Actively managed funds have a team of analysts working to beat the
defensive positions in the less risky stocks. So, in top down investing, it’s market’s average returns and take full advantage of short-term price
really looking at the big picture and finding which stocks outperform the fluctuations. It involves a lot of research and analysis like fundamental,
markets in such scenarios. technical and quantitative analysis. Their goal is to capitalize on the
inefficiencies of markets brought on by investor behaviour. An active
In bottom up investing, managers trade based on the strengths and
manager seeks to purchase stocks that are undervalued or sell short stocks
weaknesses of individual stocks, and give less weight to economic cycles.
that are overvalued. Such funds usually have higher expenses.
Remember risks can never be completely eliminated, so for example,
Passive investors on the other hand, are not concerned with short term ups
with the top down approach, sometimes even though macro conditions
and downs. They buy and hold for the long term, with limited buying and
may be good, sector or company specific factors can still impact certain
selling within their portfolios. And so fund expenses are lower, and such
stocks negatively. Similarly, with the bottom up approach, even though the
funds are more cost effective. Passively managed funds generally mirror the
company fundamentals may be strong, macro factors may still pull down
index. They have low tracking error.
performance. So really, the case again for diversification.
Host
Host
And there’s also growth vs value investing.
Right, so there are many factors at play.

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Academy expert For those of you interested, the transcript and the information shared in this
podcast is available, simply download the infographic by clicking on the
Yes. Growth investors pick stocks that exhibit signs of above-average
link provided.
growth in earnings, even if stocks appear to be expensive in terms of
metrics such as price-to-earnings or price-to-book ratios. They pick stocks Mutual Fund investments are subject to market risks, read all scheme
with higher appreciation coming from increase in EPS or Earnings per Share related documents carefully.
and low dividend yields.
Value investors do not follow the crowd. They pick stocks which trade below
their intrinsic value, where negative market sentiments are not in line
with a company’s long-term fundamentals. They buy such stocks in the
expectation that prices will eventually return to a higher level. Value picks
are stocks with higher appreciation coming from an increase in the P/E
ratio.

Host
So that brings us to the end of this podcast, thank you for joining in.
If you have completed the other modules in this course and are keen to get
certified on course completion, do try the Knowledge Check. Or, to learn
more about equity investing, do visit some of the other resources in our
Must Know Aspects of Equity Investing program.

Copyright ©2018 Franklin Templeton Investments. All Rights Reserved.

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Copyright ©2018 Franklin Templeton Investments. All Rights Reserved.