Top-down v bottom-up: How can funds best avoid accounting fraud?

RED FLAGS

Jonathan Pines, a chartered accountant by training and portfolio manager for the Hermes Asia ex Japan fund, explains why bottom-up managers might ironically be more likely victims of accounting fraud than their top-down counterparts.

Bottom-up and top-down Asia ex Japan investors use different approaches in their pursuit of outperformance. Bottom-up investors are more likely to engage in deeper financial statement analysis because the investment case is inevitably only about the stock rather than (as is the case for top-down investors) in the first instance about the country or industry.   Who is vulnerable? Given the often more careful attention that bottom-up investors pay to the company’s financial statements, it is ironic that bottom-up investors, in our view, are more likely to be tricked into investing in fra...