Growth vs value: how much are you willing to pay?

On the whole, I don’t think lockdown has been too difficult for us – and it’s certainly been adored by our dog who gets snacks multiple times a day now in an effort to keep her quiet whilst we take calls. We’ve even established a virtual weekly darts tournament and my mother-in-law has gifted us a rather large foosball table. Lots of friendly (and not so friendly) competitions help keep us away from additional screen time in the evenings.

One slightly unforeseen outcome has been that my husband is always home when my deliveries arrive – no hiding the evidence (or receipts) anymore and he’s finally found out how much I pay for face cream. What can I say? I like nice things. My husband on the other hand is more the ‘what’s today’s bargain?’ type of consumer.

Our shopping styles can actually translate into investment styles as well, as it ultimately comes down to what people are willing to pay for something. Some people (like me) will pay up good money today, while some (like my husband) will wait for a better price. You may miss out, you may not.

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham, economist and ‘father of value investing’

What is growth vs value?

One of the most common strategy distinctions in investing is between growth and value. While one isn’t better than the other, they do tend to go through periods where one delivers superior returns over the other. This usually depends on how the economy is performing and whether interest rates are heading up or down. Low interest rates tend to favour growth stocks and this is why growth has been outperforming value for the last decade.

Growth companies are those businesses that are expanding at a faster rate than their market. Share prices are usually ‘fair price’ or expensive because investors are willing to pay more for that extra growth. Growth businesses can be any size or age, but all have high growth potential for the future.

Value companies, in contrast, are cheaper because they are either disliked or under-appreciated by the market. These can sometimes be well-established companies that have been successful but have fallen ‘out of favour’.

Which style should you invest in today?

This is the million-dollar question. Hugh Sergeant, manager of value strategy ES R&M UK Recovery, recently told us how he believes it’s the best time in his career to invest. Stock markets have fallen dramatically, and many bargains can be found. He recently added positions in Next and Coca Cola, for example.

Similarly Dave Eiswert, manager of T. Rowe Price Global Focused Growth Equity, told us in a recent podcast about how even he has trouble understanding what value is. And that despite being a growth manager, he’s tempted to buy over-sold companies at a time like this.

In truth, the plunges in global stock markets mean that quality growth companies can today be picked up at much more attractive prices and value companies just got even cheaper. Some growth managers have topped up holdings at bargain prices and some value managers have upgraded the quality of their portfolios with less expensive growth shares that are suddenly not so popular.

Either way, what they all agree on is that while there is still a great deal of uncertainty in the world, there are some great investment opportunities to be found.

Three value funds to consider

  1. TM Crux UK Special Situations is run by Richard Penny who, by his own confession, is a tight-fisted Yorkshireman when it comes to his investments: he likes to find a bargain. The fund looks for under-the-radar companies which often fall into two categories: rising stars and fallen angels.
  2. Schroder Recovery is a deep value contrarian fund requiring patience, according to co-manager Kevin Murphy who says “it doesn’t work every day,” but can be profitable in the long term.
  3. Ninety One Global Special Situations is a contrarian value fund run by co-managers Alessandro Dicorrado and Steve Woolley. The fund focuses on buying companies from all over the world, that are cheap and out of favour.

We recently caught up with Alessandro who told us about taking advantage of the recent market sell-off to buy good companies at very cheap prices including names like

Three growth funds to consider

  1. Marlborough Multi-Cap Growth invests in leading companies in growing industries. The manager believes the economic cycle is largely unpredictable and prefers companies which are not therefore dependent on it.
  2. Jupiter European’s manager Mark Nichols tries to identify quality growth companies with first class management teams, strong business models exposed to the drivers of long-term growth and sustainable returns on capital.
  3. ASI Global Smaller Companies identifies smaller companies from all around the globe – including emerging markets – that the managers believe to have the best growth prospects. Co-manager Alan Rowsell says: “Like most things in life, buying quality usually pays off in the long run
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