There are a multitude of investment funds on the market that apply different investment strategies. Each investment fund has a way of operating and a policy that governs the choice of its investments according to multiple criteria, such as profitability, risk, or liquidity, and which are specified in its registration brochure with the supervisory entity.
It is important to know these criteria and which ones are best suited to the profile of each investor with a view to future financial health.
The set of these criteria is what makes up the fund’s investment strategy.
Let’s take a look at some of these strategies.
Investment strategies: What types of investors exist in the financial markets?
In a market as broad as the financial market we can find a multitude of investors grouped around different criteria: the subject, the objective and horizon of the investment, risk aversion or their investment strategies.
Investment management
A first classification of investment strategies can be made according to the degree of involvement of the manager in deciding the assets that are part of the portfolio, as well as their relative weight in the portfolio.
Active
Active management aims to outperform its benchmark over the medium term.
To this end, it makes investment decisions by analyzing the companies likely to be included in the portfolio and choosing those with the best prospects for appreciation.
The manager also determines the weight and duration of the investments in each of the portfolio’s assets.
This form of management is very dynamic and requires continuous analysis and constant review of the valuation of the assets, of the expectations of their future performance and of the investment strategy itself, seeking to outperform the benchmark index.
The field of active investing obviously includes online trading, which is becoming increasingly popular in Italy and somewhat around the world.
Passive or indexed
It is limited to investing by replicating the composition of the benchmark index and making changes if any company leaves the index, to replace it with the one that enters the index.
It requires less management work since no active strategies are performed on the portfolio, and therefore its management fee is usually lower than that of actively managed funds.
One popular passive investment example is real estate crowdfunding investing.
Passively managed funds are based on the thesis that markets are efficient and in the long term reflect the real value of companies.
Thus, they are confident that over the long term, indices will outperform actively managed portfolio.
Mixed
Both investment options can be combined giving rise to mixed management, i.e. choosing one or the other strategy depending on market behavior.
If the investor seeks to reduce his operating costs, he will look for a passive management portfolio; however, other investors will seek profitability through the choice of companies with the greatest potential for revaluation.
Another type of miscellaneous way of investing can be achieved thorugh P2P loans partecipation.
Value investing
Managers who operate through value investing look for companies that are trading below their underlying value.
In this way, the manager will take the opportunity to buy shares in the company when its share price is below his estimate of its value, waiting for the price to converge with that underlying value.
Growth investing
This strategy aims to invest in companies with high earnings growth potential.
Their stock market price may be very close to their underlying value, but that value is expected to increase thanks to the growth of the company’s business.
They are usually small, young companies operating in high-growth markets, or in disruptive sectors. Growth investing requires tolerating a high level of risk.
GARP criteria
GARP stands for Growth at Reasonable Price.
It is an investment strategy halfway between value investing and growth investing. It tries to select those assets that are booming but at a moderate price, not too high but not at an excessive discount, which would be an indicator of low growth capacity.
Investment based on technical analysis
Technical analysis is a tool used to try to predict the future evolution of a security based on the information available on its past behavior.
It attempts to forecast the evolution of the price. Within this type of analysis is the graphical or chartist analysis, which studies the graphical figures of the asset’s prices.
It is important to know the degree of liquidity of a market when proceeding to its technical analysis, since in markets with low liquidity the effectiveness of this method may be reduced.
Investment based on fundamental analysis
This other method focuses on the study of the variables that affect the value, i.e. the economic environment, the sector, the economic cycle, the company’s strategy, equity, degree of indebtedness, etc.
It aims to calculate the real price of a security, to find out whether its price is in line with its value or whether it is undervalued or overvalued. For example, value investing, mentioned above, is an investment strategy based on fundamental analysis.
Buy and Hold
This consists of buying securities with the objective of holding them in the long term, seeking to pocket the income they generate (dividends, in the case of equity securities).
Acquisition prices are usually higher, as large, stable companies with a good position in the stock market, high profits, low debt and dividend payouts are generally sought.
This strategy also minimizes the transaction costs of selling securities by holding them over time.
Investment in cyclical companies
This is a strategy that requires a medium or long investment period, at least one economic cycle, which can last several years.
It is based on investing in companies that are highly exposed to fluctuations caused by the economic cycle (such as financial institutions or consumer durables companies, etc.) at the bottom of the cycle, when they will be penalized by the market, and selling these assets when the share price has risen significantly, in the recovery part of the cycle.
Contrarian investing
This is based on investing in companies that have been heavily punished by the market due to a one-off event, thus going ‘against’ the market, but which are solid.
The manager will wait for their share price to recover and then sell them.
Socially responsible investment
Integrates environmental, social and good governance (ESG) criteria in the process of study, analysis and selection of securities for an investment portfolio, all of which are increasingly taken into account by investors.