CFA Level 1 - Alternative Investments
Growth style managers typically focus on an issuer's future earnings potential. They try to identify stocks offering the potential for growing earnings at above-average rates. Where value managers look at current earnings and assets, growth managers look to the issuer's future earnings power. Growth is generally associated with greater upside potential relative to style investing and, of course, it has concomitant greater downside risk.
- Traditional growth style investing has also spawned a few sub styles, specifically, disciplined growth or growth-at-a reasonable-price (GARP), and aggressive, or momentum, growth.
- Disciplined growth style managers concentrate on companies that they believe can grow their earnings at a rate higher than the market average and that are selling for an appropriate price.
- Aggressive growth styles tend not to rely on traditional valuation methods or fundamental analysis. They rely on technical analysis.
Look at a particular industry such as transportation. Because the holdings of this type of fund are in the same industry, there is an inherent lack of diversification associated with these funds. These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest. On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will face heavy losses due to the lack of diversification in its holdings.
Index Strategy Tends to track the index it follows by purchasing the same weights and types of securities in that index, such as an S&P fund. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500.
If you can't beat the market, why not join it? We go over your options in the following article: The Lowdown On Index Funds.
A global strategist builds a diversified portfolio of securities from any country throughout the globe (Not to be confused with an international strategy, which may include securities from every other country except the fund's home country.) Global money managers may further concentrate on a particular style or sector or they may choose to allocate investment capital in the same weightings as world market capitalization weights.
Stable Value Strategy
The stable value investment style is a conservative fixed income investment strategy. A stable value investment manager seeks short-term fixed income securities and guaranteed investment contracts issued by insurance companies. These funds are attractive to investors who want high current income and protection from price volatility caused by movements in interest rates.
Dollar-Cost Averaging Dollar-cost averaging is a straightforward, traditional investing methodology. Dollar-cost averaging is implemented when an investor commits to investing a fixed dollar amount on a regular basis, usually monthly purchase of shares in a mutual fund. When the fund's price declines, the investor can buy a greater number of shares for the fixed investment amount, and a lesser number when the share price is moves up. This strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down.
This is a strategy in which an investor adjusts the amount invested, up or down, to meet a prescribed target. An example should clarify: Suppose you are going to invest $200 per month in a mutual fund. At the end of the first month, thanks to a decline in the fund's value, your initial $200 investment has declined to $190. In this case, you would contribute $210 the following month, bringing the value to $400 (2*$200). Similarly, if the fund is worth $430 at the end of the second month, you only put in $170 to bring it up to the $600 target. What happens is that compared to dollar cost averaging, you put in more when prices are down, and less when prices are up.