Question

How do technical analysis and quantitative decision rules compare to the process of following the various stages of the economic cycle and macroeconomic indicators like unemployment, interest rates, economic growth, etc. At a very high level, provide examples of how a manager would use each “style” to guide investment decisions.

Answer 1

An example of a long term capital decision would be to buy machinery for production. This is important as it affects the long term earnings of the firm. Short term investment is related to levels of cash, inventories, etc. These decisions affect day to day working of the business.Mutual fund managers are assigned the job of investing money in the best available equity shares. In doing so, they choose to carry out research on the available investment prospects in the market. ... Mutual fund managers start by studying the global and domestic macro economic scenario before committing their funds.

The performance of various investment managers will differ according to the economic environment. This is because their ‘investment styles’ may differ, that is, the way they arrive at their investment decision. For example, some managers may employ a ‘top down’1 style, others a ‘bottom up’2 approach. Some investment managers will perform best under one set of circumstances, while another manager will outperform under another set of conditions.

Active management Active managers attempt to exceed the performance of the market in a specified timeframe. They do this by buying and selling securities based on research, market forecasts and their own judgement and experience. This is a frequent buy and sell approach to investing which, in addition to the cost associated with research, makes active managers generally more expensive than index managers. Managers review investments regularly to try to benefit from movements in the market or from growth in individual stocks. There are two types of managers who use active management – multi-managers and single managers.

Multi-managers – MLC Multi-managers do not invest in securities directly themselves. Instead, they utilise the skills of different specialist investment managers to make the investment decisions. They are a ‘manager of managers’. They may sometimes use active management or use both active and index management styles together, as they choose managers that have complementary styles. Multi-managers have relatively low manager risk.