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Equity Valuation and Portfolio Management by Harry M. Markowitz, Frank J. Fabozzi

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TRADITIONAL ACTIVE MANAGEMENT

Traditional investment managers focus on stock picking. In short, they hunt for individual securities that will perform well over the investment horizon. The search includes in-depth examinations of companies' financial statements and investigations of company managements, product lines, facilities, and the like. Based on the findings of these inquiries, traditional managers determine whether a particular firm is a good buy or a better sell.

The search area for traditional investing may be wide—the equivalent of the equity core—and may include market timing that exploits the dynamism of the overall market. Because in-depth analyses of large numbers of securities are just not practical for any one manager, however, traditional managers tend to focus on subsets of the equity market. Some may hunt for above-average earnings growth (growth stocks), while others look to buy future earnings streams cheaply (value stocks); still others beat the grasses off the trodden paths, in search of overlooked growth and/or value stocks (small-cap stocks). Traditional managers have thus fallen into the pursuit of growth, value, or small-cap styles.

Traditional managers often screen an initial universe of stocks based on some financial criteria, thereby selecting a relatively small list of stocks to be followed closely. Focusing on such a narrow list reduces the complexity of the analytical problem to human (that is, traditional) dimensions. Unfortunately, it may also ...

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