Some of the major sub categories of the two major style of active equity management (top down and bottom up) are listed below;
- Growth managers: Growth managers can be classified as either top-down or bottom-up. The growth managers are either divided into large capitalization or small capitalization. The growth managers buy securities that are typically selling at relatively high P/E ratios, due to high earnings growth rate, with the expectation of continued high earnings growth. The portfolios are characterized by high P/E ratios, high returns, and relatively low dividend yields.
- Market timers: The market timer is typically a set category of top-down investment style and comes in many varieties. The basic assumption is that he can forecast the market i.e. when it will go up or down. In the sense he market timer is not too distant than the technical analyst. The portfolio is not fully invested in equities. Rather he/she moves in and out of the market depending on the economic, technical and analytical skills he/she dictates.
- Hedgers: The hedger seems to buy equities but also to place well-defined limits on the investor’s investment limits. One popular hedging technique involves simultaneously purchasing a stock and put option on that stock. The put option sets a floor on the amount of loss that one can make (if the stock process go down) while the potential profit (if the stock prices go up) is diminished only by the original cost of the put. This is an example of the relatively simple hedge.
- Value managers: These are sometimes referred to as contrarians. This is because they sometimes see value where many other market participants don’t. These buy securities that are available at a discount to the face value and sell them at or in excess of that value. They can fall into either the top down or bottoms up approach. Value managers use dividend discount.
- Group rotation managers: The group rotation manager is in the sub category of the top down equity management style. The basic idea behind this technique is that the economy goes through reasonably well-defined phases of the business cycle, namely, recession, recovery, expansion and credit crunch. The group rotator believes that he can discern the current phase of the economy and forecast as to which phase is going to evolve. He can then select those sectors and economies that are going benefit. For example if the economy were perceived to be on the verge of moving from recession to recovery, the group rotator would begin to purchase stocks in the appropriate sectors and specific industries that are sensitive to the pick up in the economy.
- Technicians: They discern market cycles and pick up securities solely on the basis of historical price movements as they related to the projected price movements. By reading a chart and artfully discerning patterns, the technician hopes to be able to predict the future path of the price action models P/E, earning surplus etc. In terms of characteristics, value managers have relatively low betas, low price book and P/E ratios and high dividend yields.