Most financial commentary lately presumes portfolio management fits into one of two broad buckets: stockpicking or indexing. But the investing universe isn't that bifurcated.
Top-down investing, our bread-and-butter at Fisher Investments, is an often overlooked active-management approach -- one that, properly practiced, can help you maintain diversity, avoid errors and improve long-run results, in my view.
Bottom-up stockpicking analysis focuses on selecting securities based primarily on company-specific criteria the picker finds attractive. Criteria vary: They could include low price-to-earnings ratios, high revenue growth, "momentum" or "low volatility." There are many possibilities, typically combined to form a set of criteria used to screen the wide world of stocks.
Top-down operates on the philosophy that higher-level decisions regarding sectors, styles, size and country weightings impact long-run results more than stock selection. Firms in the same category typically respond to similar drivers. For a recent example, consider energy.
Energy firms are generally quite sensitive to oil prices, which affect profitability directly. For explorers, integrated firms, pipelines and energy-equipment companies, high oil prices benefit profits. Refiners, by contrast, can benefit from low oil prices, since they must buy oil to turn into gasoline. Between June 2014 and January 2016, Brent crude oil prices fell 77.1%.[i] Of the 115 MSCI World Energy sector constituents on June 30, 2014, only five rose during that stretch. All five were refiners. While other energy stocks' negativity varied, roughly two-thirds fell more than 50% over the same span. The macro mattered more than anything company-specific in this case -- and that happens far more often than most realize.