Many investment professionals today practice what's broadly labeled as "bottom-up" investing, or investing based on stock selection to achieve performance. At Fisher Investments, we deploy "top-down" investing—first analyzing big picture factors like economies, politics, and sentiment to forecast which investment categories we believe are most likely to outperform the market. Only then does Fisher Investments begin to look at individual securities. Thus, top-down down investing is inevitably more concerned with a portfolio's aggregate exposure to investment categories, rather than with any individual stock, to generate performance. This means investment strategies are based on prevailing market and economic environments, which often change, making this an inherently dynamic model of investment.
Fisher Investments believes asset allocation is a primary performance driver
A top-down investment process also helps Fisher Investments focus on what we believe is most important to investment performance results: Asset allocation and sub-asset allocation decisions. Our research shows approximately 70% of long-term portfolio performance returns are attributable to asset allocation, or the stock, bond, and cash proportions within each portfolio. Fisher Investments uses unique quantitative and qualitative analysis of current market conditions, history, and behavioral factors to help make dynamic tactical asset allocation decisions designed to benefit portfolio performance.
Fisher Investments believes sub-asset allocation is a secondary performance driver
Fisher Investments believes the next 20% of a portfolio's relative performance can be attributed to sub-asset allocation decisions, or decisions on how to weight country, sector, size, and style factors. Fisher Investments uses a multitude of indicators or “drivers” to determine desirable country and sector allocations to achieve performance results. The first set of drivers is economic, such as monetary policy, yield curve, and relative GDP growth analysis. The second set of drivers is political, such as taxation, governmental stability, and political turnover. The third set of drivers is sentiment, primarily used to measure consensus thinking to identify investment categories' relative popularity.
Fisher Investments believes security selection is a tertiary performance driver
Next, Fisher Investments' research shows individual security selection, or stock picking, is responsible for roughly 10% of a diversified portfolio’s total performance return over time—a very small portion. However, despite its relatively small impact on portfolios, security selection can sometimes be the difference between outperforming or lagging a benchmark over time. But more often than not, Fisher Investments finds higher-level portfolio decisions dominate investment performance results.
Fisher Investments believes our top-down investing approach offers us flexibility in our portfolio construction as we design portfolios seeking to generate market outperformance in any investment environment.