Managed funds: Bottom-up approach is finally starting to reap dividends

The extraordinary rise in the FTSE 100 index this year has not been good news for everybody involved in the investment industry. Funds which track the index or put their money in large, blue-chip companies have enjoyed excellent returns, but others have not been so successful. In particular, managers who follow the so-called value investment strategy have been left standing.

Active fund managers are traditionally placed in two camps. A value investment manager tends to use complex financial calculations about price, dividends and earnings to find companies which he believes are undervalued and show the most potential. This means that he will tend to go for small and medium- sized companies in the hope that they will outperform. This is sometimes known as "bottom-up" investing.

A growth manager is more likely to invest in blue-chip companies and other sectors which are expected to perform well. Growth managers are more likely to take a "top-down" approach, looking at overall market considerations such as economic and political factors before choosing any stocks.

This year value managers have seen stock market growth mainly concentrated in a small number of very large banks and pharmaceutical companies. Small and medium-sized companies, in comparison, have been largely bypassed. This divergence in has left funds specialising in value investments with some pretty puny performances.

But for the first time in ages there are signs the market could be changing. The past few months have seen an improvement in the performance of many small and medium-sized businesses. This has begun to boost the growth of value funds.

Bill Vasilieff, head of product and development at M&G, is adamant that the value strategy as a concept is not dead, saying: "Fashions change and the trick is to be ahead of the game, not following it. Cheaper, less fashionable stocks are already showing significant better performance over the past few months."

Doug Brodie, an independent adviser at Master Adviser, adds: "Value investment is how you would handle the portfolio of a widow or orphan, or someone who cannot afford to risk too much of their capital.

"If there is a big fall in the market, value investors will show a lower loss than other types of investment."

- Tony Bonsignore