BLOG: Is growth or value the best investment strategy?
For those unfamiliar with the concepts, growth companies are those that have demonstrated better-than-average gains in earnings in recent years and that are expected to continue delivering high levels of profit growth – although this not a guarantee. Investors tend to pay a premium for these stocks – in the hope these companies continue to grow at pace.
By contrast, value investing is an investment strategy that involves picking companies whose shares appear to be trading for less than their actual value. This can be for a number of reasons such as a change in management or a short-term headwind which impacts the sector it operates in. Value investors are essentially looking for bargains – good companies at cheap prices.
Growth stocks tend to thrive in a low interest rate world but also tend to suffer when the global economy begins to slow. By contrast, value stocks often sit in cyclical industries and can do well in an early economic recovery, but struggle when there is a strong bull market.
Growth dominates over a decade
For the past decade, there’s been no debate whatsoever. Value companies have underperformed growth companies on a global scale by almost 150% over the past 10 years*.
With a relatively strong macroeconomic backdrop and unprecedented disruption across industries, growth dominated, with the likes of technology and e-commerce leading the way as people increasingly take their lives online.
The Covid pandemic was a further catalyst for that online move and focus on growth industries. Technological behemoths like the FAANGs (Facebook, Amazon, Apple, Netflix and Alphabet/Google) rose to record highs. The question became not whether value was out of favour – but whether as a style it had become obsolete.
But things have changed recently, as the past few months have breathed a new lease of life into value investing. The vaccine bounce and a Brexit agreement have resulted in an upturn in performance.
Value rallies have tended to be fast and furious in recent times – it’s been almost a case of blink and you’ll miss it. The trillion-dollar question now is whether the re-opening of the global economy will add further fuel to these value-led sectors? Or, with little or no inflation in the system and the drivers behind the low interest rate, low growth world (which caused the quality growth stocks to outperform) unchanged, will growth continue to dominate?
Don’t try to guess
The truth is no one really knows the answer. Thankfully, there are a number of funds which sit on the fence – giving you the potential for returns in either economic scenario.
Good examples in the income space include Artemis Income and Rathbone Income, and global offerings include Fidelity Global Special Situations and T. Rowe Price Global Focused Growth Equity. Janus Henderson European Focus and Barings Europe Select Trust are other options for those looking for a regional focus.
*Source: FE Analytics, total returns in pounds sterling, MSCI ACWI Growth and MSCI ACWI Value, 15 April 2011 to 14 April 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre