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Blurring the lines between growth and value.

Byline: Trevor Law

COMMENTATORS and analysts seem to spend a huge amount of time arguing the relative merits of growth stocks versus value stocks when it comes to investing in company shares.

Are we currently experiencing the "Great Rotation" from growth to value? Has value outperformed growth over the long term? Which investment approach works better in a rising interest rate environment? Should I invest with a growth fund manager or a value manager? These are all questions that you might see posed in the pages of specialist investment papers or websites. However, I often wonder whether this is a spurious comparison used by analysts to justify their outpourings and fund management groups' marketing departments to differentiate their offerings.

Especially as a large number of companies including Johnson & Johnson, Coca Cola and Philip Morris appear in both the S&P 500 growth and value indices.

Fidelity puts the dilemma in stark terms. "Weighing the merits of these two competing investment styles is like deciding between Batman versus Superman. You want both."

Confused yet? Let's start with a broad outline. Axa states: "Growth fund managers look for high-quality, successful companies that have posted strong performance and have expectations to likely continue to do well.

Investors are willing to pay high price-to-earnings multiples for these stocks in expectation of selling them at even higher prices as the companies continue to grow. The risk in buying a given growth stock is that its lofty price could fall sharply on any negative news about the company, particularly if earnings disappoint.

"On the other side, value fund managers look for companies that have fallen out of favour but still have good fundamentals. The idea is that stocks of good companies may bounce back in time when the true value is recognised."

Merrill Edge notes: "History shows us that growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling. Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market."

However, some see no distinction between the two approaches.

Thomas Martin, senior investment analyst at Brown Brothers Harriman, commented: "Brown Brothers Harriman does not believe categorising stocks in this way is helpful when building portfolios. In our opinion, the value/growth dichotomy attempts to draw precise boundaries between stocks and funds where, in reality, none exist. All fundamental investors would agree that their end goal is the same regardless of philosophy: to buy an asset for less than its intrinsic value."

Warren Buffett, the legendary Oracle of Omaha, is forthright too.

In his letter to Berkshire Hathaway shareholders in 1992, Buffett wrote: "Many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. In our opinion, the two approaches are joined at the hip. Growth is always a component in the calculation of value."

Elaborating in 2000, he went on: "Market commentators and investment managers who glibly refer to growth and value styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component - usually a plus, sometimes a minus - in the value equation."

Investors are best served in the long run by holding a diversified portfolio of shares, spread across different sectors and geographies. They will also benefit from investment managers who put their clients' money into well-managed companies with excellent prospects of giving a decent return, regardless of whether they are considered growth or value stocks.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: The views expressed in this article should not be construed as financial advice
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Publication:The Birmingham Post (England)
Date:Nov 30, 2017
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