[MUSIC] Hi there. Building a portfolio the top down way, that's what we're going to have a look in this video. So by the end of this video, you will see which factors are needed to build a portfolio using this method. And how they can be combined successfully to the alternative method, which is the bottom-up method. And that's what you are going to see in the video of our corporate sponsor. So two separate methods, which can be combine and we'll see which conditions one is to be preferred to the other. So let us start with the top-down way to build your portfolio. So the top-down is a macroeconomic or macro driven methodology, where by you start by having at look at the global pictures. Indeed for instance, talking about the global pictures or oil countries combined. You have a look at, say, the impact of the falling oil prices on the world economy. Is it going to be benefiting some countries versus the other? Is it a global shock which is the inflationary? That kind of thinking. So at this level, if you're managing, say, an equity portfolio; you may be dealing with a universe of stocks. So, say, maybe 2,000 stocks. So the idea when you see this inverted triangle is to shrink this universe and end up with an investable portfolio. So once you define this global picture then you move into the countries, and in here you will be looking at the economy, economic policies, monetary and fiscal, social political factors, and demography. Indeed, demographics have also to be taken into consideration, and especially the aging population factor which results actually in the pyramids, looking more like this one, with the proportion of elderly people increasing fast in some countries like Japan. And this has an impact clearly, the appetite for risk. So once you defined the country, location, which one you prefer, whether it's the U.S., whether it's Europe, Japan, Asia, or emerging markets, and you move them in to the single countries, preferences, you may want to go one layer below and that's the sectors. And here are sectors that can also be defined within a country or globally. It makes some sense to, for instance, if you are locating a sector wise to look at, say, an insurance company in the US, and compare it to one competitor in Europe or in Asia and see which of the three companies is more attractive. Here, we're talking about growth trends in sectors, i.e., sensitivity of the single companies to the economic cycles. And we also focus on evaluation. So once we have this 3 layers of decisions which are taken global, country, sectors, then we may have shrunk the 2,000 stocks universe to maybe 200. So basically, we only keep 10% of our universe as investable, and that's when the top-down approach can be combined to the bottom-up one. The bottom-up one, you start from the bottom and you go up to build your portfolio. So here you start with say, a valuation screening. Now, we see that we have done the top-down first. So we have conducted a fundamental macro driven analysis. And then, we have these 200 stocks and we go upwards. We do some screening here. We do some valuation screening from these 200 companies. Which are most attractive in terms of valuation. We already saw in other videos that we're talking about PEs, price-earning ratio. We can also use cash flows, we can use dividends, we can use return on capital employed. We can use all sorts of metrics, valuation metrics to determine which stocks are most attractive and do some ranking with this. So this is the first layer here of valuation screening. Then, this is an important step. We do a more microeconomic analysis, fundamental analysis, and here we have two options. The first one is what we call primary research. And this entails company visits. Basically you as a portfolio manager or as an analyst, you go and visit the company and you've read all sorts of documents on the company informations and you ask questions, ideally to the chief financial officer. But more often than not, this would be through the communication officer. But the idea here is to really enable you to get primary information. The primary research analyst actually builds his own database, and comes up with his own earnings estimates. Those famous earnings which we then use, we as strategies, those will conduct the top-down parts of the strategy, we use the bottom up earnings estimates. Which are taken from analysts who conduct the primary research and come up with their own estimates of what the future earnings cash flows, etc., on the firms will look like. Alternatively, you can also conduct what we call a desk or a secondary research. This is easier, it does not entail that you go and visit the companies. You may just sit at your desk and get the primary research which are provided by broker firms, for instance. And basically, you make up your mind of which company is more interesting after reading these reports. Once you've conducted this primary or secondary research, you may add an extra layer, this is optional, which we called technical analysis. A lot of people say, you have to do the research. Say, this company is interesting, but then we need to find the right timing for answering into a position. And that's where our technical analysis can help. What is technical analysis? We won't be making a course here, but basically it entails watching price movements, basically all the information you need here is the price evolution in history. And then, you compute some moving averages, you derive some trends, you divide some support and resistance line. Basically, there's all the various techniques which you can use but, again, these techniques focus exclusively on the price history. On using the price history of the company, and then it may help find you the correct entry point. Anyhow, once you have done all this bottom-up research fundamentally driven, then you come up with some targets, the idea is that you say, this is my portfolio, you go from 200 stocks to maybe 50 or 75 stocks. Which you invests in a fund or in your portfolio, and importantly you need to define our priority X ante, some 12 months targets. And the question then will be once you reach these targets ideally, what do we do? Do we keep the stocks, do we sell? Basically, we need to reassess whether the fundamentals still justify keeping the share. [MUSIC]