But what are growth stocks, what are value stocks and why is this important? We recognise that wealth managers are prone to jargon and, over the past months, in the webinars and articles we have been providing, we have often spoken about growth and value stocks without pausing to take breath and explain what we mean by these terms. This article is that pause.
Why is this important? Because, taking this year in isolation, the gap in performance between the MSCI growth and value indices has grown to an astonishing 17% (as at the time of writing). That is an extraordinary difference, which is worthy of comment and shows what investors are seeking out.
Growth and value are basically two approaches to investing in stocks and shares. Essentially, growth investors are looking to invest in companies that offer strong earnings growth. Value investors, meanwhile, are looking for stocks that appear to be undervalued relative to their worth according to their balance sheet (or in other words, a bargain because of their perceived value now, not their future growth potential). It’s a bit like the hare and the tortoise, except in our story it is the market conditions that tend to determine who wins (and so far the hare has won most races).
Growth stocks are companies that have had better-than-average increases in earnings and profits in recent history, and are expected to continue on this trend. This makes them very attractive and so they tend to be priced at a higher level than the broader market. Investors are willing to pay the inflated price-to-earnings multiples on the expectation of future growth, enabling a later sale at even higher multiples. History has shown that this earnings growth can come despite what’s happening in the economy, and history has been repeating itself recently.
Growth stocks, however, do tend to be more volatile than the broader market. The risk is that the price could fall sharply on the back of negative news that could impact investors’ earnings expectations for the company.
Value investors, meanwhile, are looking for companies that have fallen out of fashion, but still have good underlying fundamentals. This type also includes the shares of companies that have yet to be noticed by investors because they are new, or merged with a peer company to become more competitive. Because they are out of favour, value shares tend to have a lower price than the broader market, but – as investors seek out ‘good’ companies – the expectation is that they will bounce back in time, when the true value is recognised by other investors, or when the issue behind the company’s problems (disappointing earnings, negative publicity or legal problems, for example) fades or disappears.
Value stocks tend to carry less risk than the broader market, because the bad news is already priced in, but most bad news takes time to turn around, so these stocks tend to be more suited to longer term investors.
As with anything to do with investing, however, life is not simple. There is a continual debate over which style – growth or value – should produce better returns over the long term. Some studies, for instance, have shown that value investing outperforms growth over extended periods of time on a value-adjusted basis. Given the short-term focus of many investors who want to get rich quick, value stocks are ignored in favour of their brash growth peers and, as prices fall to new low levels, there are greater buying opportunities for value investors.
Other studies have also highlighted that growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. Value stocks, meanwhile, are often stocks in cyclical industries, which may do well early in an economic recovery, but typically struggle to maintain that momentum in a bull market.
So what should investors do? Diversify. Although we currently have a bias towards growth, it is marginal and a product of the uncertainty we are living in. Value stocks tend to be more cyclical (see our recent article highlighting our focus on defensive stocks). We currently favour the higher quality option, which tends to be growth companies such as Mastercard, whose revenue should not be hugely impacted by COVID-19 in the medium term.
Ultimately, however, when the economic cycle changes we may shift that weight. Value stocks have historically delivered when stormy market conditions start to dissipate and economic growth reasserts itself. Does this mean we will ditch growth in favour of value? No. Strong companies could very well get stronger, as the US growth market shows, and it is important to carry out a thorough analysis of the opportunities and risks each represents. Beyond that, both styles complement each other and we have plenty of cash to overweight value stocks if we see an opportunity. It will be the strength of the wind in the storm which will determine our position. In turbulent weather, mariners may choose to trim their main sail. As conditions improve, the main sail will be once more hoisted and head sails deployed to maximum advantage.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help, or call +44 (0)1624 645000 to speak to our client services team.
If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
+44 (0)1624 645813
Nedbank Private Wealth manages mainly multi-asset portfolios, so our communications don’t tend to focus exclusively on one asset class. However, today we propose discussing equities. Why? Because when you consider the news headlines, and then consider equity markets, we appear to be living in a parallel universe.
Read moreThe news feed from the coronavirus is all consuming, and rightly so. A disease that was widely touted, just a couple of months ago, as ‘similar’ to influenza has infected millions and killed hundreds of thousands of people.
Read moreTwo major disasters have crossed paths and it seems that the only good news we read about these days relates to how the coronavirus pandemic is slowing down climate change. Otherwise the press is full of heart-breaking stories of loss, peppered with acts of kindness and a sense of us trying to pull together. No one can tell us with absolute certainty what the future looks like, or when this will end. It can feel like we are staring into the deep unknown.
Read moreOne of the first lessons you are taught when studying anything investment related is the role diversification plays. For my investment exams, I was taught a diversified portfolio consisted of around 20 stocks ‒ a mere nod to today’s view. Instead, your portfolios – if you are a client of Nedbank Private Wealth that is – are invested across thousands of companies.
Read moreAs we witnessed in our latest webinar (click here for the Q&A), investors are struggling to understand everything given the tsunami of news. Markets have begun to claw back losses in some areas, but there may well be more bad news ahead, before we see a sustained trend in positive headlines. So what’s next?
Read more“He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves.” ― Gabriel García Márquez, Love in the Time of Cholera
Read moreAs children, most of us were excited to visit a sweet shop – I definitely was. Dazzled by the bright display of shelf upon shelf of glass jars, there were sweets of every possible shape, colour and taste – all covered in sugar. Some coins lay in my hand, but which sweets would I choose?
Read moreToo often we believe clients sit in too much cash. We understand why people do this, but we think that too much can be an issue. How much do you really need?
Read moreWe are one of only a handful of wealth managers who use currency management as part of our investment approach. In this short 45-second video, we explain why.
Read moreInternational Women’s Day was on Sunday 8 March, a day that since 1910 has focused attention on women’s rights. The day – and the invitation to speak on the topic at the Institute of Directors on 6 March – prompted me to think through how much has changed for women in the last 110 years. While there are still challenges ahead, this is pivotal time for women.
Read moreAllie Kirk, private banker, speaks to Rebecca Cretney, one of our investment specialists, about the current market turbulence.
Read moreIf you are interested in becoming a client, please complete the form via the ‘become a client’ button below. Alternatively, if you are already a client, or if you have a question about how we help clients in particular circumstances, please use the ‘contact us’ button.
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