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Investment decisions—top-down or bottom-up?

By ATB Investment Management Inc. 28 May 2019 1 min read


Top-down or bottom-up? Investment analysis is often classified as using either a top-down or bottom-up perspective. Top-down refers to a focus on the macroeconomic environment, and is typically used by economists. Investment analysts can try to determine how macroeconomic trends will affect individual companies, but they can also use a bottom-up perspective that focuses heavily on individual companies’ operations irrespective of the macroeconomic environment.

What is a top-down approach

Top-down analysis requires a large amount of economic forecasting. An investment manager using top-down analysis would form an opinion on the state of the economy, using information such as Gross Domestic Product (GDP), unemployment numbers, trade data, inflation data, and various other measures. Many of these statistics are widely covered by the media. Recent examples include China’s growth slowdown, the yield curve’s inversion, the lengthy bull run in stock prices, the impact of pipelines not being built in Canada, Donald Trump’s election and the subsequent trade battles, etc. A top-down manager will forecast where the economy will be in the next several years. They would then determine which countries, sectors, or companies would benefit most based on their macroeconomic view, and would change their portfolio to reflect that view. For example, they could emphasize companies that have a higher portion of their revenues in the US, if they believed that the American economy were to grow much more quickly than Canada’s.

What is a bottom-up approach

Bottom-up analysis focuses on finding individual companies that an analyst believes will perform well regardless of the macroeconomic environment. An analyst would begin with a company’s financial statements (balance sheet, income statement), and also consider various valuation measures. Aside from the quantitative measures, the analyst would also consider qualitative components such as the people running the company and the firm’s corporate culture.

And our approach is?

ATB Investment Management Inc. hires investment sub-advisors who follow a primarily bottom-up approach to their analysis securities selection. Our sub-advisors try to find strong sustainable businesses that will generate strong operating results regardless of the stage in the economic cycle. This is not to say that different companies won’t be affected differently by macroeconomic changes. It is to say, however, that our sub-advisors don’t believe the broad economy’s fluctuations are easily predicted, and that there is more benefit to trying to find companies with strong business models that can withstand economic fluctuations.​

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