FBIM 602 TOPIC 3C: INVESTMENT

STYLES AND STRATEGIES

INVESTMENT STRATEGY

 An investment strategy is a plan or approach that an investor uses to guide their investment decisions
with the goal of achieving certain financial objectives. It involves a systematic and disciplined approach
to investing that takes into account the investor's risk tolerance, financial goals, and market conditions.

 An investment strategy typically involves selecting a portfolio of assets that are expected to perform
well over a certain time horizon, based on the investor's objectives and risk tolerance. The portfolio may
include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other investments.
The investor may also use various methods of analysis, such as fundamental analysis, technical analysis,
or a combination of both, to identify undervalued assets or those with potential for growth.
INVESTMENT STRATEGIES

An investment strategy
is a set of rules that
Investors select
guide investment
strategies based on:
decisions regarding a
portfolio of assets.

Risk appetite Time Horizon Income Goals

TYPES OF INVESTMENT STRATEGIES
1 2
Value Investing: involves Growth Investing: selecting
investing in stocks that are stocks with very high growth
undervalued. potential (e.g.,
Facebook, Apple, Amazon, N
etflix, and Google - formerly
Alphabet (FAANG) – top tech
stocks in the world)
3
Momentum Investing:
building a portfolio of stocks
that have been exhibiting a
rising price trend for a period
of time.
TYPES OF INVESTMENT STRATEGIES

4) Aggressive Investing: 5) Conservative Investing: 6) Income Investing:

portfolio largely comprised aims to preserve value by investing in stocks that
of high-risk stocks [small investing in low-risk produce a steady stream of
and mid-cap stocks] companies [blue chip stocks] income [e.g., Dividends]
INVESTMENT STRATEGY VS INVESTMENT STYLE

 An investment strategy refers to the overarching approach or plan that an investor uses to achieve their
financial goals. It involves identifying and selecting a portfolio of investments based on factors such as
risk tolerance, time horizon, and financial objectives.
 On the other hand, an investment style refers to the particular approach or methodology used to select
individual investments within a portfolio. For example, an investor may choose to follow a
fundamental analysis approach and select investments based on the financial health and performance
of the underlying companies. Alternatively, an investor may choose a technical analysis approach and
make investment decisions based on trends and patterns in the market.
 In summary, investment strategy refers to the broad approach an investor takes in managing their
portfolio, while investment style refers to the specific methods or techniques used to select
individual investments within that portfolio.
INVESTMENT STRATEGY VS INVESTMENT STYLE

 These two are intricately linked.

 Value investing, growth investing, momentum investing, and other approaches are often referred to as investment strategies. However,
they can also be considered investment styles because they reflect a particular way of selecting and managing investments within a
portfolio.
 For example, value investing is an investment style that focuses on buying stocks that are undervalued by the market based on
fundamental analysis of the company's financial metrics such as price-to-earnings ratio, price-to-book ratio, and dividend yield. This style
emphasizes the long-term prospects of a company and tends to be more patient in waiting for a stock's price to reflect its intrinsic value.
 Growth investing, on the other hand, is an investment style that focuses on buying stocks of companies that are expected to grow faster
than the overall market or industry. This style emphasizes the potential for earnings growth and often involves investing in companies
with high levels of innovation, research and development, and market disruption potential.
 Momentum investing is an investment style that focuses on buying stocks that have recently shown strong performance, and typically
relies on technical analysis to identify trends in the market. This style is based on the belief that stocks that have performed well in the
recent past will continue to perform well in the near future.
 Overall, investment styles and investment strategies are related concepts that reflect different aspects of an investor's approach to
managing their portfolio. An investment style refers to the particular way of selecting and managing investments within a portfolio, while
an investment strategy refers to the broader approach or plan that an investor uses to achieve their financial goals.
 The investment/portfolio management styles of
market participants can be broadly split into
two types:
(1) Passive strategies and

INVESTMENT (2) Active strategies.

STYLES
These two styles differ in terms of the specific
goals of the managers implementing them.

https://www.thebalance.com/actively-vs-passivel
y-managed-funds-453773
PASSIVE MANAGEMENT
Passive managers aim to track a specific benchmark by
replicating its return pattern over a period of time. The
goal is therefore to replicate the benchmark at the lowest
cost

Followers of passive management believe in the efficient

market hypothesis (EMH) (this is covered in detail in
Topic 4). It states that at all times, markets incorporate and
reflect all information, rendering individual stock picking
futile. As a result, the best investing strategy is to invest in
index funds, which have historically outperformed the
majority of actively managed funds.
PASSIVE
MANAGEMEN
T
 Active managers aim to outperform a specific benchmark, for example
the Standard and Poor’s 500 index or the FTSE/JSE ALSI.

Active management is the use of a human element, such as a single

ACTIVE manager, co-managers or a team of managers, to actively manage a
fund's portfolio. Active managers rely on analytical research, forecasts,
MANAGEMENT and their own judgment and experience in making investment decisions
on what securities to buy, hold and sell

If an investor believes that the EMH holds, they do not believe in Active
Management
ACTIVE
MANAGEMEN
T
 A popular group of passive investments in South Africa are the
Satrix Tracker Funds. They are essentially designed to track or
replicate a particular index and so hold the same shares that are
contained in the index in the same weighting as they appear in
the index. This allows the fund to save money in terms of
research and paying expensive portfolio managers, and so the
management fees are far less than actively managed funds.
https://satrix.co.za/news/article?id=52
ACTIVE VS
Actively managed funds allow the fund managers to buy and
PASSIVE sell whatever they think best fits the funds strategy, and so they
have greater flexibility. As you’ve seen in the previous graph,
FUNDS actively managed funds can outperform their benchmarks,
although historically, most of them have failed to do so. The
major point to remember is that these funds come with much
higher management fees, which erode their profitability.
Therefore, it is often better to invest in a passively managed
fund, than it is to invest in an actively managed fund. However,
you then forfeit the opportunity for abnormally high returns.
https://www.fool.com/investing/2018/09/18/active-versus-passiv
e-funds.aspx