Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
We have officially become ‘those people’ – we now have our milk delivered to our door. I was incredibly sceptical, but my husband found a local milk man – Gareth – who now delivers us fresh oat milk (and orange juice) every Saturday. My husband was clever – he sold me on the sustainability of reusable glass bottles and supporting small businesses (he’s knows his audience). I loved the idea, but feared a very large ‘but…it cost x10 more’. It does cost slightly more, but it’s about £5 more a month. I’m very much a quality shopper so it was a no-brainer. What’s interesting is that my husband is usually very much a bargain shopper! Our shopping views brought me back to a popular debate: value or growth investing? Or maybe a mix of both?
“Someone’s sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett
Value investing, or contrarian investing as it is sometimes called, is all about finding a bargain. It’s investing in unloved companies whose share prices have fallen. Value investors like finding companies that are trading cheaply – their shares are currently worth less than they think they should be – think of value investing like finding a good Black Friday deal.
But you have to take care. Sometimes when you go shopping in the sales you can get a great deal – 75% off a TV or computer or a smart phone. Sometimes you can have buyers’ remorse, or buy something you don’t actually want (or need) simply because it’s on sale. The same is true for value investing. How do you know if you’ve bagged a bargain or if you’ve just invested in a dud that is just going to go out of business?
To avoid these mistakes, value fund managers need to build a strong understanding of why something looks cheap. It may be out of favour for good reason – perhaps because the management team have made mistakes, or it operates in an industry that faces serious challenges. Or it may be that other investors have missed something positive about the firm that suggests its fortunes could turn around.
Schroder Income is a deep value fund which has little correlation with other income funds, tending to avoid the big income producers in favour of more niche names. The managers firmly believe in the principles of value investing and that stock markets are inefficient because people make irrational decisions.
Learn more about how emotions affect our finances.
ES R&M UK Recovery aims to find companies that are yet to deliver on their promise. These are good businesses which are currently experiencing below normal profit levels – which are depressing their valuations – but with the management capability to turn things around. The fund holds approximately 200 of these out-of-favour stocks in the portfolio.
Ninety One Global Special Situations is a high conviction, contrarian value fund run by co-managers Alessandro Dicorrado and Steve Woolley. The fund focuses on buying out of favour companies from numerous sectors across the globe.
Growth investing, or quality investing, is when you invest in good, established companies, or those that are doing really well and growing more than their competitors. To get these characteristics, however, you’re willing to pay up. When you’re shopping, these are your quality purchases that you believe it’s worth paying more for.
Growth managers are looking for not just winners but those with the potential to grow. This means considering the sector the company is in, as well as the company itself. Simply put: a growth stock should be growing.
Baillie Gifford Global Discovery looks for smaller companies with significant growth prospects across the globe. While the small-cap nature of the fund means it is not for the faint hearted, the team has delivered an excellent long-term track record of returns to investors.
GAM Star Disruptive Growth is a global equity fund looking for companies across a variety of industries which are set to benefit from the disruption that the next wave of technological change will bring about. It’s a concentrated fund with a maximum of 40 holdings.
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.”
Both strategies will do well at different times. Growth has flourished in the second decade of the 21st century, as low interest rates and low economic growth rates have had investors looking to companies that can growth more than everything else around them. Technology has also been booming, which is a growth area.
Value strategies tend to do better when economies are doing well – for example when the world re-opened after the Covid lockdowns. Over the very long term this strategy has also outperformed. If you think about it, it’s easier to make money if you’ve bought something cheaply and then sold it on than if you’ve bought something that was already expensive.
It doesn’t mean that growth investors can’t profit – of course they can, and they have – but fundamentally growth companies often need more capital to continue to expand and that can sometimes prove difficult.
A mix of both styles is probably the best way to insulate your portfolio for the long run. That way you can make the most out of every economic environment.
You can achieve a mix of both styles through individual funds or through a multi-asset fund that blends styles for you.
Rathbone Strategic Growth Portfolio is a best of breed fund that looks to target risk and then maximise returns. The team has an outcome-focused approach and complete flexibility of where to invest – this includes actively-managed funds and investment trusts, as well as passives and direct equity holdings.
TB Wise Multi-Asset Growth sits in the flexible sector, giving the fund significant discretion over asset allocation, and is allowed to invest up to 100% in equities. The fund has a very slight value bias which means buying a stock or fund at a low share price and waiting until it increases in value before selling. However, the fund is not exclusively value in nature.
Artemis Monthly Distribution invests in both bonds and equities from around the world, with the ratio to each asset class dependent on market conditions. The fund typically has around 150 to 200 holdings and is an excellent ‘all weather’ option for income-focused investors.