First principles of investing

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4. Which type of manager?

Does your investment manager stick to a lucid philosophy and set clear investment targets against which you can measure results - for example to beat the FTSE All-Share by 1% over a rolling three year period.

• Passive managers (index trackers) aim to track an index and may not consider the merits of stocks, sectors and economic cycles. Where the process tries to outstrip the index returns by deviating in a specific way, this is known as quantitative management.
• Active managers may aim to increase a fund's value by deviating from a specific benchmark - for example a stock market index. The two basic techniques are bottom up and top down.
• Bottom up managers look first at the company, its history and potential future prospects. Only then do they consider the performance and prospects for the relevant sector, followed by national and international economic factors.
• Top down managers operate in reverse, starting with international and national economic factors and gradually working down to the individual companies.
• Smallcap/large cap: Capitalisation can be a good indicator of the risk/reward profile. Larger stocks are more stable but less exciting. Smaller companies are much more volatile.

1. Five steps to establish your investment goals 2. Your attitude to risk and reward 3. The major asset classes 4. Which type of manager? 5. Your investment assessment kit 6. Is past performance a guide to the future? 7. Easy access deposits for emergencies 8. Fixed income products 9. A rising income 10. The choice of collective equity funds 11. Pensions and ISAs 12. Tax efficient but may be very risky 13. Selecting your shares 14. Your stockbroker 15. Buying your shares 16. Ethical Investment 17. When to sell 18. How to keep your portfolio on track 19. Do you need an adviser? 20. Conclusion

• First Steps in Shares
• How to Read the Financial Pages