Often we read that fund manages implement top-down or bottom-up approach of investing. Please explain them.
In the top-down approach, the fund manager determines the sectors and industries that he expects to do well in the future. Once these are identified, he picks out companies within that sector or industry that can be invested in. This approach involves the analysis of macro-economic factors.
On the other hand, the bottom-up approach focuses more on company. The implicit assumption here is that companies can perform well even though the sector/industry in which they operate is not doing well. The bottom-up approach can get more challenging since there is a huge universe to pick the stocks from, unlike the top-down approach where the universe gets narrowed down to companies operating in select industries. However, it also presents the opportunity to discover some value bargains which otherwise could have been missed in a top-down approach as a result of omission of that industry.