Up close and profitable?

However, a few fund management groups are a bit more open about the degree to which the big picture informs their portfolio selection. For example, Newton has a clear house view, with a strong top- down element, which its managers incorporate into their process for choosing shares.

Tineke Frikkee, who runs Newton’s Higher Income fund, says: “We have a global thematic approach and look for long-term trends such as the ageing population in the UK. The increasing number of wealthy older people creates opportunities in certain sectors such as cruise companies, pharmaceuticals and healthcare products. This helps guide our choice of stocks.”

The formula has been very successful. Over the past five years the fund has returned 54 per cent, putting it eleventh of the 70 in its sector.

The big-picture approach has also worked well for Andrew Green, manager of the GAM UK Diversified fund. Jonathan Wallis, a research analyst at Allenbridge, the independent financial adviser, says: “Mr Green looks at economic cycles in global markets to see where the best opportunities lie. He tries to identify sectors that he thinks will do well and then looks for stocks that will fit that view.

“He is a genuine top-down investor who is prepared to switch not just between sectors but between asset classes. When the bear market arrived he went heavily into cash and was one of the few fund managers to make money in 2002.”

His record has also been outstanding. Over the past five years his fund has returned 71.1 per cent, putting it eleventh of the 230 funds in its sector.

Dan Kemp, of Christows, the stockbroker, says that some fund managers, such as Neil Woodford, of Invesco Perpetual, are sometimes wrongly classified as stockpickers when they have a considerable top-down element in their decision-making process.

It was Mr Woodford’s decision to make a big sector bet on tobacco that has helped his High Income and Income funds to deliver outstanding performance. They are third and fourth out of 66 equity income funds over the past five years.

Mr Kemp says that one episode in Mr Woodford’s career neatly illustrates both the advantages and the pitfalls of a top-down approach. “In the late 1990s he came under heavy fire when his performance suffered because he did not buy into the technology boom. But he was eventually vindicated when the bubble burst in 2000 and he produced one of the best returns of any fund manager that year.”

Mr Kemp adds: “Stockpicking certainly has its place but several studies have shown that it is asset allocation that accounts for most of the variation in fund performance.”

Magnus Grimond:

THE “top-down, bottom-up” debate has probably been going on since stock markets began. Should an investor look only at the characteristics of individual shares? Or concentrate on the big picture? It is hard to find any professional moneymen who admit to relying exclusively on one approach. Most claim to use an amalgam of the two. For instance, Ed Burke, manager of the Invesco Perpetual UK Aggressive Fund, says: “It can be an artificial distinction. I don’t think you can divorce the two. You can’t pick stocks in a vacuum. You have to look at what’s going on in the economy and in the stock market and you have to look at the fundamentals of the business.”

He would agree with Mark Hall, who runs the Rensburg UK Select Growth Trust, that no technique is right for all circumstances. The recent bull market is a case in point. Mr Hall says it has been hard to make forecasts about broader trends since the third quarter of 2003. “I don’t have any conviction to make top-down or ‘macro’ calls, so most of my resources have been devoted to addressing a bottom-up approach because my ‘central case’ view is that we will muddle through.”

But sorting “stockpicking moments” from “macro calls” is itself an area for debate. Simon Elliott, an investment trust analyst at Winterflood Securities, the marketmaker, believes stockpicking works best when markets are dull and moving sideways.

“In the past year or two, markets have been very strong and, particularly last year, it was an asset allocation call that would have led to the best performance, with commodities and energy, while Japan did very well towards the end of the period,” he says.

Observers also point out that focusing only on the characteristics of individual shares is likely to mean that your investment performance will diverge from the market indices. This can be difficult for professional managers whose results are often measured against such benchmarks.

“People are so worried about leaving the benchmark that they tend to keep a foot in both camps,” says Peter Walls, of the Unicorn Mastertrust fund of funds. “They may say a fund is ‘actively managed’, but it is really a closet index fund.”

In fact, says Mick Gilligan, of Killik & Co, the stockbroker, there is an information advantage for stockpickers. Investors who get to know companies well by regularly meeting their management will more easily create an edge for themselves than those who try to, say, predict the future course of currencies, which is notoriously difficult.

The truth is, good investors must know when to rely on top-down or bottom-up approaches. And that is down to good judgment.

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