This chapter shows how different investment policies and strategies are used to achieve the investment objectives of a mutual fund. The restrictions on investment imposed by regulations and the construction of the fund are described together with the effect of borrowing and gearing.


Each mutual fund has one or more investment objectives. For example, to provide an above-average and increasing income and a yield about 50% higher than the relevant index. It is the investment manager's task to achieve these objectives, by pursuing a stated investment policy. Each investment management company will adopt an appropriate policy for each of its funds but will tend to have an overall ‘house style’ or strategy. Two contrasting approaches are:

  • ‘Bottom-up’. Known as stock-picking. The manager looks for outstanding individual companies. They can be identified from research reports or from personal knowledge of their products, services and management.
  • ‘Top-down’. Starts with asset allocation. The manager reviews world or national economy trends first, determines his asset allocation model in terms of geographic and industrial spread, then examines industries in detail and finally selects companies that will benefit from the trends.

Another contrast in styles between different houses is between passive and active management.

Passive management occurs when portfolio changes are made only in response to changes in specific external ...

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