February 6, 2024

Value Vs Growth Investing, Which Side Are You On?

Value Vs Growth Investing, Which Side Are You On?

2024 is set to experience global growth with key financial analysts such as Goldman Sachs Research forecasting above-consensus GDP growth in 2024. But it is not necessarily smooth sailing as Q4 of 2023 could see Central Banks maintaining high interest rates to combat inflation.

This raises the question - should you focus on growth or value as an investor?

Whether you are a seasoned investor or are just starting, deciding on an investment strategy will play a major role in how you build up your portfolio.

While growth and value investing styles seek to provide the best possible returns for investors, there are advantages and disadvantages either way. Here's what you should know about both investing styles.

What is growth investing? 

Growth investing focuses on building a portfolio around investments that are likely to experience faster-than-average growth. Growth in this case is mainly measured through revenue, earnings, or cash flow.

An example of a growth stock would be to invest in a young or small company whose earnings are expected to grow at an above-average rate. This can be done by comparing it to their industry sector or the overall market.

However, established companies can also be a growth stock. Such was the case for American Airlines and United Airlines, which experienced exponential growth due to increased travel post-pandemic.

When you invest for growth, you are looking at capital appreciation that has the potential to outpace the market average. 

Historically, growth investments have performed better during bull markets, which makes focusing on equity allocations a better approach to taking advantage of favourable economic conditions. 

Of course, there are factors that you need to consider for a growth fund such as the company’s ability to achieve above-average valuations and whether it is involved in a rapidly expanding industry (e.g. technology and healthcare).  

Advantages:

  • Potential higher return: Potential to realise substantial returns in a shorter period.
  • Revenue stream opportunity: Can generate a good income stream if the growth investments’ dividends grow in tandem with rapidly rising earnings.

Disadvantages:

  • Market affected: Market downturns tend to affect growth investments significantly.
  • Higher risk: The absence of a large margin of safety increases the probability of losses.

What is value investing?

The goal of value investing is to find the ultimate bargain. For example, stocks or assets that have low prices in relation to factors such as earnings, sales, and net current assets of the company. 

One of the main points of being a value investor is buying stocks or assets that are temporarily out of favour or at a bargain price, with the expectation that the share price will eventually return to a higher level when the stock comes back into favour.

This also means that your investment decisions tend to go against the crowd, focusing instead on a company’s fundamentals and taking advantage of the market’s overreaction to negative sentiment.

When it comes to market performances, value stocks give more stability during a bear market, which makes utilising fixed income and treasuries a better strategy. 

Well-known value investors today include Warren Buffet, Joel Greenblatt, and Benjamin Graham

Advantages: 

  • Lower risk overall: Less probability of a sudden large loss if the value is not currently inflated due to market sentiment.
  • Potential consistent returns: Investing in mature industries and well-established but undervalued companies can provide more stable returns.

Disadvantages:

  • Value dropping further: If the drop has not bottomed out, the value of its stocks may continue to slide further.
  • Yield lower returns: May yield lower returns on an annualised basis when compared to growth-focused investments.

Choosing an investing strategy that fits you

What style of investing would suit your portfolio best depends on market conditions, your financial goals, and your risk appetite.

However, using only a single approach may not be the best idea as you would need to take into account your personal risk tolerance, financial goals, and whether you are looking at a short or long-term investment horizon.

Diversification is key to mitigating risks and generating strong returns that are independent of the effects that both styles pose. 

For example, Pacific Asset Management, one of our partner Investment platforms, shared examples of their diversification strategies going into Q4 2023. Will Bartleet, Chief Investment Officer of Pacific Asset Management, had discussed the Diversifying Assets approach to manage risk. He mentioned that these strategies are important for generating returns that can be competitive with equities, fixed-income securities or any other major asset class.

Bartleet classifies the Diversifying Assets approach as the following:

  • Absolute Return: Strategies that trade across assets with strong risk control to generate returns based on macroeconomic cycles and relative valuation.
  • Alternative Risk Premia: Exploiting strategies such as carry, momentum and valuation in a relative way across asset classes such as FX and Fixed Income. These are long-established premia that can be implemented at very low cost.
  • Tactical Opportunities: Strategies in FX and Interest Rates that are seen as attractive at a given point in the economic cycle. Examples can include FX trades designed to hedge market risks or strategies designed to exploit the shapes of the yield curve in government bonds.
  • Trend: Exploit the tendency for markets to exhibit momentum. Strategies trade across assets to find and follow trending markets.

A key benefit of this strategy is that, during a high-interest rate environment, you have the potential to earn the cash rate on top of your portfolio’s market performance. 

Circumventing the cost of access is also a potential benefit as these diversifying strategies can be implemented at very low cost when cash rates are low.

Building a diverse portfolio around both growth and value investing strategy will be the true path to investing success for the robust investor.

If you would like more information or expert advice on building an effective investment portfolio, feel free to contact our private wealth managers or fill out the form below for a personal consultation.

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