Value versus growth is an age-old debate amongst investors. Questions from clients are normally along the lines of: after a decade long trouncing by growth stocks, ‘is the recent value revival the start of a new era of outperformance or just a flash in the pan?’ And ‘is your portfolio style more growth or value?’ These are both good questions but neither has a simple answer. In our minds the problem is twofold.
On the first question, clients are asking the wrong people! In our hearts, we are stock pickers, at our happiest and best when looking at the detail of a company’s business model and understanding the dynamics of the industry it operates in. Our world is full of small but important fundamental details such as product launches, pricing strategies, cost structures and capital allocation plans. A lot of time is spent understanding the impact of companies on the environment and the communities they operate in; and engaging with management teams to understand their plans and to hold them to account on important issues.
Like most investors, we observe the various gyrations of markets and the swings in sentiment back and forth. Generally speaking, however, we feel we have no real insight compared to others on where the market as a whole will go. We completely understand that such questions are important for clients, who are focused on understanding how different asset classes are likely to perform so they can adjust their portfolios accordingly.
However, asking a stock picker to have an insight into asset allocation is akin to asking a footballer to play rugby – there are some transferable skills between the two sports but you wouldn’t want to have Jonny Wilkinson taking the crucial penalty in the football world cup final!
The second question implies that value and growth are mutually exclusive styles, opposite sides of the proverbial coin. This is a concept that we struggle with. A lot of the confusion stems from what people mean by “value” and “growth”. Our view of value is that it is simply the discipline of working out what a company is worth by using fundamental analysis to understand the likely cashflows over time, discounting those cashflows back to their value today and potentially buying them when the market price is far below this value. However, often when people talk of a “value” investment style they simply mean a portfolio which is invested in companies trading at low valuation multiples.
Value and growth are not synonymous and many “growth” investors will also carry out intensive due diligence to estimate future cash flows. The difference is that a “growth” company’s valuation will mostly be determined in later years (and hence there is a higher degree of uncertainty) whereas a company found in a “value” portfolio will have much more of their worth determined in the near term, probably because the business is more mature and its markets are changing less rapidly. Both can provide good returns and often which investment appeals more is down to the personality, skill set and experience of the fund managers.
So where does that leave us as investors in the value versus growth debate? We view our role as providing an attractive total return to clients over the medium term through a combination of above market initial yield but also the ability to grow that yield over time. We feel the best way to do that is to be open to all sorts of opportunities, across the whole of the European market and across the full market cap spectrum.
We spend our time hunting for companies where the future cashflows are being undervalued by the market today. In our experience, this normally comes either when good companies fall out of favour in the short term, or in companies who are relatively unknown to investors and so where the strong cashflow hasn’t been recognized widely. This focus on fundamental analysis leads us to own both “value” and “growth” types of investments, making it difficult to neatly characterize us as one or the other.
Ultimately, we would instead prefer to reframe the question to one about what role we can play in creating a client’s overall portfolio. In our minds that role is clear – to complement other investments, whether a passive exchange-traded fund or an active large cap focused fund, and to provide a differentiated source of income and total returns. We can leave the discussion on value versus growth to others.
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein.
Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies.
This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.