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What's
better,
value
or growth ...
well,
it depends.
There has recently
been significant media interest in analysing fund managers' investment
styles and the way this influences their funds' returns. Some media
attention has focussed on determining which is the 'best' investment
style, in particular, predicting which style will suit the current
investment environment.
While not intending to dampen
the spirit of the debate, it is not possible to say which style is
better or worse than the other.
You may be looking
for a level of differentiation between managers. Selecting a manager
based on their consistent approach to investing, their investment
capabilities and an ability to complement other managers is sound
investment advice.
Value and Growth investing in theory
A manager's style (or philosophy)
is a reflection of their fundamental approach to investing. A value
manager aims to determine the most appropriate price they should pay
for a security relative to the income that security can produce over
time.
Value managers believe that
markets are affected by many factors including emotion, and shares
can trade above and below their fair value at certain times. They
aim to exploit market conditions, searching for 'bargain-priced' shares,
buying them when they represent good value and selling once they become
overpriced.
Growth managers, on the
other hand, concentrate on shares that focus on providing superior
future growth, with less emphasis on their current price.
Does it work in practice?
Traditionally, it was possible
to determine a manager's investment style based on the shares held
in their portfolios. Recently, however, this distinction has become
blurred. A growth manager, for example, would rarely admit to buying
overpriced stocks simply for their growth potential. Similarly, a
value manager would not purchase a stock because it was undervalued
if it didn't show signs of profit growth. Most managers rely on their
rigorous screening and analysis techniques and their selection criteria
to determine which shares to purchase or sell - regardless of whether
they have been categorised as value or growth shares in the past.
Many factors affect share
prices, including investor sentiment. At times, certain shares will
appear cheap or expensive depending on the value placed on them by
the market. Technology or telecommunications shares, for example,
have been categorised as growth shares because of the strong returns
they have provided in recent times and the expectation of continued
strong growth in the future. Does this mean that they can not become
part of a value manager's portfolio? Not necessarily. As well as growth
potential, a value manager would judge these shares based on their
ability to deliver an appropriate income stream relative to their
current price, their sound business practices and long term outlook.
As a result, value and growth
managers may hold similar shares, but at different times. One benefit
of including both investment styles in your portfolio is the diversification
benefits that this creates. Value and growth styles can complement
each other, resulting in better overall performance of your investment.
A manager's capabilities in stock
selection is important
As a value investor,
Rothschild's research underpins our ability to determine when a security
represents good value and guides us in our decision to buy or sell.
At times, therefore, we will hold shares, which have been categorised
as neither growth nor value. Our reasons for purchasing these shares
results from our assessment of the value they represent.
What's better - value or growth?
As we have discussed, one
investment style is no better or worse than another - they are just
different. When selecting appropriate portfolios for your clients,
diversification between asset classes is important. However, another
dimension to diversification can be achieved in your portfolio by
selecting managers with different investment styles.
For
more information on the issues raised in this article, or
about Rothschild's managed investments and retirement funds,
please call 1800
672 222
between 8.00am and 7.00pm (Sydney time), Monday
to Friday,
or visit our website at www.rothschild.com.au.
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in any state, foreign country or jurisdiction where such offer or
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The information
is based on Government laws and regulations current at time of issue
(April 1999). This information is not intended to be relied upon for
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