Dear Dagen: A Glossary of Fund Management Terms

Momentum, GARP, top-down, quantitative and more defined.
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Doctors say "intubate" when they mean shove a tube down your throat.

Mutual fund managers say "GARP" when talking about buying a growth stock that's reasonably priced.

To understand a business, you need to know the basic words that get thrown around. And to understand what you are really investing in, you need to know mutual fund jargon.

In case you're too embarrassed to ask, the following is a short glossary of ubiquitous money-management terms.

Active Management

An active manager is either picking stocks or trying to forecast the direction of a market with the goal of beating the performance of a benchmark.

In recent years, active management has been as successful as Russian economic development in beating the best-known benchmark, the

S&P 500

. But these folks keep trying -- for a hefty fee.

Passive Management

Investors who follow a passive approach don't believe they can beat the performance of any given market by picking stocks or forecasting what's going to happen to that market. Instead, the idea is to buy the entire market. Index investing is a form of passive management.

Growth

Country music singers love the words "cheating" and "heartbreak." Mutual fund managers love the word "growth."

As an investment style, growth means an investor is buying the stocks of companies that will experience above-average earnings growth in the future. (The standard definition includes companies with earnings rising faster than the economy.) An aggressive-growth manager would look to buy the fastest-growing companies.

Value

The opposite style of growth.

Value managers buy stocks that appear to be cheap. Value managers hunt for such bargains using a variety of measures. Some examine a stock's price-to-earnings ratio or price-to-book ratio to find companies that are trading at discounts. Others, like

Oakmark

, will conduct even more in-depth research to determine the underlying private value (the reasonable price a company might fetch in a sale), then buy the ones whose stocks are selling at a pronounced discount.

Any way that you look at it, the value manager buys with the assumption that the price gap will close.

GARP

This awkward acronym stands for "growth at a reasonable price." You'll often hear this term emerge from the mouths of money managers when they are trying to give a snappy summary of their investment approach.

In simple form, it means a manager is buying growth stocks that aren't too expensive. Blending the growth and value styles, GARP managers aren't willing to pay

any

price for a growing stock. They have their limits. Instead, they have their own financial targets for determining what is a good buy and what isn't.

For example, a manager's edict might be to buy stocks with price-to-earnings ratios less than that of the S&P 500 but with earnings growth rates greater than the benchmark's. That means the manager's picks should be growing faster than the average stock in the S&P 500 but selling at a cheaper price.

Maybe GARP is just an easy excuse for a growth manager to buy value stocks or for a value manager to buy growth stocks.

Momentum

A momentum investor studies the strength of stocks by charting price, volume or earnings trends, looking for upward patterns that point to stocks that will continue to move higher.

The idea is to ride this strength to investment success and sell before this momentum begins to head in the opposite direction.

The momentum crowd is sometimes blamed by other managers and investors for running up stock prices in fleetingly popular segments of the market. The Internet sector is a good example.

These days the somewhat pejorative term "momentum" tends to be shunned by investors who actually follow the approach.

Top-Down Approach

With this method, an investor uses broad economic trends as a first screen for possible investments then focuses on specific industries and companies within those industries.

If interest rates are low, for example, a manager might be led to areas of aggressive growth like the Internet. Low interest rates make it cheaper for these young companies to borrow money and grow.

Bottom-Up Approach

These managers pick stocks by examining companies on an individual basis. This can be done by conducting hands-on research or by screening companies.

One cliche you'll often read is that a bottom-up manager loves to go out and "kick the tires." That just means that the guy is visiting companies and meeting with management to make sure that the donuts are coming off the assembly line or to ensure the company actually exists.

Janus

, known for its aggressive research department, has been touting its personal-inspection approach in its advertising.

Market-Timing

Market-timers try to predict future market directions, usually by examining recent price, volume or economic data, and then invest based on those predictions. At times, they'll think it's better to be in the market. At other times, they'll think it's better to be in cash. A pure market-timer wants to eliminate stock selection altogether, so when he is in the market, he might buy index funds.

Mutual fund companies often will throw this term around, accusing any investor who trades frequently of being a market-timer. Active trading may not work, but it isn't necessarily market-timing.

Quantitative Analysis

To sound like you know you're talking about, call this "quant" for short.

This investment process involves using complex mathematical computer models to determine which stocks to buy and sell. But these are not the kind of computer programs you'll find in shrink-wrap at

CompUSA

.

One well-known quant is Chuck Albers, co-manager of the Oppenheimer

(MSIGX) - Get Report

Main Street Growth & Income fund. His multipronged approach combines a "top-down" model, which scours economic data, and a "bottom-up" model, which considers valuation, momentum and company-specific measures.

Focused Portfolio

A focused portfolio is one that's limited to a small number of stocks, which can increase the opportunity for gains but also increase volatility.

These focused funds, which will own approximately 20 to 40 stocks, have become rather trendy over the past few years. Some for good reason. The

(JAVLX)

Janus Twenty fund, now closed to new investors, has a three-year annualized return of 40.8%.

They funds are easy to find. Just look for the word "focus" or a number in its name.

Any terms you'd like to see explained in a future column? Send them, or any other comments or questions, to

deardagen@thestreet.com. Please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.