Top-down and bottom-up are two common investment approaches used by WALT ST. Knowing what they are and how they are applied constructing investment portfolios can help you understand the factors most likely to impact investment returns.

Taking it from the Top:
The top-down approach begins by looking at broad measures and forecasts for the global economy and markets, followed by progressively deeper drilling down through geographic regions and countries, industrial sectors, sub-sectors and finally, individual companies. Top-down denotes the “broad-to-narrow” order in which various factors are evaluated before coming to an individual stock selection decision. In detail, they are:

Region/Country Factors:
These are assessed in order to form a view on which geographies are creating or experiencing conditions conducive to positive or negative economic performance. These might include projections for a country’s gross domestic product (GDP), government debt and deficit figures, currency exchange rate forecasts and interest rate outlooks. For example, one outcome of such analysis may be a view that interest rates should fall across Europe.

Sector and Sub-Sector Selection:
Once broader geographic, economic parameters have been defined, our strategists begins to explore the industrial sectors in those countries that are well-positioned to benefit from the projected economic climate. From our example above, in a falling interest rate environment, the financials sector should do well. A further sub-sector evaluation is done to determine whether, amongst financial companies, banking or insurance companies are more likely to outperform.

Company selection:
The final step in the top-down process is to select specific company stocks from the chosen industrial sub-sector that also fit within the stated objectives of the portfolio.

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