Bottom Up

Bottom-up strategies begin the asset selection process with data at the individual asset and company level, i.e., the smallest unit or the bottom of the market being evaluated. Bottom-up quantitative investors will harness computer power to apply their models to this asset- and company-level information as long as the information is quantified. These investors typically begin their analysis at the company level before forming an opinion on the wider sector or market (the whole of or the top of the market). After identifying individual companies, the bottom-up approach will evaluate the true value of a company and compares that value with its current market price to determine which stocks are undervalued or overvalued.

Bottom-up strategies can in turn also be broadly categorised as either Value oriented or Growth oriented

Under Value oriented we may find the following (slide)

Contrarian
Relative Value
Income Investing
Deep Value
Distressed investing

We will briefly expound on some of these

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Contrarian investors buy and sell shares against prevailing market sentiment. Their investment strategy is to go against the crowd by buying poorly performing stocks at valuations they find attractive and then selling them at a later time when their valuations have recovered. Contrarian investors often point to research in behavioural finance suggesting that investors tend to pay too much attention to recent trends. A contrarian investor tries to determine whether the current value of an individual company, industry, or entire market is irrational—that is, undervalued or overvalued at any time—and whether that irrationality represents an investment opportunity.

Both contrarian investors and value investors who do not describe their style as contrarian aim to buy shares at a discount to their intrinsic value. The primary difference between the two is that non-contrarian value investors rely on fundamental metrics (looking at the share itself) to make their assessments, while contrarian investors rely more on market sentiment and sharp price movements to make their decisions.

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A value investor with a deep-value orientation focuses on undervalued companies that are available at extremely low valuation relative to their assets. For example, if a company’s valuation is much lower than its book/accounting value. Such companies are often those in financial distress. The rationale is that market interest in such securities may be limited, increasing the chance of informational inefficiencies. The deep-value investor’s special area of expertise may lie in reorganizations or related legislation, providing a better position from which to assess the likelihood of company recovery.

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As for an asset manager with a Growth oriented approach, its focus is on companies that are expected to grow faster than their industry average or faster than the overall market, as measured by revenues, earnings, or cash flow. Growth investors usually look for high-quality companies with consistent growth or companies with strong earnings momentum. Characteristics usually examined by growth investors include historical and estimated future growth of earnings or cash flows, underpinned by attributes such as a solid business model, cost control, and exemplary management able to execute long-term plans to achieve higher growth. Because growth companies may also have volatile earnings and cash flows going forward, the intrinsic values calculated by discounting expected future cash flows are subject to relatively high uncertainty. Compared to value-focused investors, growth-focused investors have a higher tolerance for above-average valuation multiples. Other variations in style within the Growth Category are High Quality and Relative Value