Four common investment strategies of fund managers

The criteria that mutual fund managers use to select their assets vary widely according to the individual manager. So when choosing a fund, you should look closely at the manager's investment style to make sure it fits your risk-reward profile.
Investment style is incredibly important because of the way that investing works.
Both risk and return are connected to style. According to current practice portfolio theory, you can optimize a blend of styles for diversification, balancing reward and risk.

Here's a look at four investment strategies with which you can personally manage your funds:

• Top-Down investing
• Fundamental and technical analysis
• Contrarian investing
• Dividend investing

1. Top-down investing
For example, if a fund manager anticipates that the economy will grow sharply, he or she might buy stocks across the board. Or the manager might just buy stocks in particular economic sectors, such as industrial and high technology, which tend to outperform when the economy is strong.
If the manager expects the economy to slump, it may spur him or her to sell stocks or purchase shares in defensive industries such as health care and consumer staples.
The great advantage of top-down is that you're looking at the forest rather than the trees.

2. Fundamental or technical analysis
Fundamental analysis involves evaluating all the factors that affect an investment's performance. For a stock, it would mean looking at all of the company's financial information, and it may also entail meeting with company executives, employees, suppliers, customers and competitors. You want to analyze management, really understand what's driving the company and where growth is coming from.
Technical analysis involves choosing assets based on prior trading patterns. You're looking at the trends of an investment's price.
Most managers emphasize fundamental analysis, because they want to understand what will drive growth. Investors expect the stock to rise if a company is growing profits, for example. But fundamentals don't always carry the day. You can have a period of time where the market moves on technical.
The best managers use both fundamentals and technical.

3. Contrarian investing
Contrarian managers choose assets that are out of favor. They determine the market's consensus about a company or sector and then bet against it.
The contrarian style is generally aligned with a value-investing strategy, which means buying assets that are undervalued by some statistical measure.
In the long run, value has beaten growth in assets around the world, though during certain periods that's not true. The contrarian style generally rewards investors, but you have to choose the right assets at the right time.
The risk, of course, is that the consensus is right, which results in wrong bets and losses for a contrarian manager.

4. Dividend investing
As the name suggests, dividend funds buy stocks with a strong record of earnings and dividends. Because of the stock market volatility of recent years, many investors like the idea of a fund that offers them a regular payout. Even if the price goes down, at least you're getting some income.
However, the recent popularity of dividend stocks causes some market pundits to wonder if they’re currently overvalued. Also, beware of funds with extremely high yields. That could be a sign that companies are taking outsized risk and are headed for declines.

Most experts advise diversifying among investment styles. In the end, a balanced way of looking at things tends to create fewer errors.

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