Do you understand investment management-speak?

Key takeaways

  • Some managers specialise in selecting individual shares – known as stock picking.
  • Some managers invest in the same securities that make up the market but take small bets investing more or less in any single security than is in the index – they are known as benchmark cognisant.
  • Managers who stock pick typically build a portfolio through their choice of shares or other securities – they are said to build a portfolio from the bottom up.
  • Managers who decide on exposures to sectors or regions, and build portfolios accordingly, are said to take a top-down approach.

The investment industry has a language of its own, but it’s code is relatively easy to crack with a few basic terms. Here are a few you may find useful:

Stock pickers

Managers who spend a lot of time researching individual shares and pick them on the basis of knowing the business and its potential are known as stock pickers. Stock pickers are often successful individual managers.

High-conviction managers

Some active managers make decisions to invest very differently to the index against which their returns are benchmarked.

Managers who invest heavily in a small selection of securities and whose portfolios are very different to that of the benchmark are known as high-conviction investors.

Investing with a high-conviction manager can give you good performance above the market, but it can also result in your investment performing a lot worse than the market if the manager’s calls on where to invest do not work out.

Benchmark cognisant

Some managers take small bets against the benchmark – this means they invest in mostly the same shares or other securities that are represented in the benchmark with just slightly higher or lower weightings in each one.

Managers whose portfolios are very similar to those of the benchmark are referred to as benchmark cognisant and they may still outperform the market.

In the investment industry, a manager may be negatively referred to as a benchmark hugger or closet index-tracker if its portfolio is very similar to its benchmark index.

Bottom-up investing

Managers who refer to themselves as stock pickers are often also what is known as bottom-up investors. They choose each share based on its merits and do not consider whether it is within a particular sector or industry or region.

Bottom-up managers who manage asset allocation funds allow their choice of shares, bonds or listed property to dictate the asset allocation of the fund.  

Top-down investing

Some managers allocate a certain percentage of their portfolios to different sectors, parts of the economy or regions that they think will do well. They then select shares within those sectors. These managers are known as top-down managers.

Downside risk

Managers who focus on avoiding losing money on the investments they have made are said to manage downside risk.

Investment style

Managers may follow a particular investment or style if their investment strategy broadly conforms to one that has been identified as an investment style.  

Managers who follow a particular style can deliver performance better than the market. However, it may also result in a manager underperforming the market for periods – sometimes long ones - when an investment style is out of favour.