Is there value in growth investing?

UK Investment Director16 Jun 2022

Many investors now fear there is no value in growth investing. Rotation seems driven more by sentiment than reality. Is the style only suited to economic certainty, calm markets and lower interest rates? This year almost all growth company shares have been soldoff, with a collapse in investor confidence. While value investing covers a wide range of approaches, growth investors tend to be more focused, leaving a lack of hiding places. This has been a painful period for growth investors, and particularly advisers and clients who have allocated to the style.

Studies have shown that in times of market turmoil investors tend to focus more on macroeconomic news and headlines, rather than company results. Yet in the recent reporting season many growth companies reported good growth and gave a lot of information on current trading and prospects. This was not so much trying to predict the unknowns of inflation, central bank policy and geopolitical stress, but explaining how each challenge might impact their activities and profit, and how they planned to respond. Meetings with company managements are the key to understanding real business risks, and how well a company is in control of its own destiny. Amidst the sell-off, much useful information from well managed resilient businesses has not been fully absorbed by the market.

History points to the periods after market down years usually delivering good returns. Human nature when fear prevails, means this pattern is easily overlooked. Amidst the panic of the financial crisis or at the start of the pandemic, investors found it difficult to look longer term. It seemed hard to envisage a market rebound or even a return to a ‘normal’ economy. Yet there are always growth sectors in the economy and business that prosper amidst economic downturns. These businesses will grow, generate cash, and some may even be bid for. The need for resilience, shorter supply chains, digital transformation and software automation, is driving strong growth in businesses with those specialist services. Labour market tightness works in favour of some B2B services that improve efficiency, as well as those that can help to manage talent and retain it. Stressed budgets within government and households do not stop an economy from being dynamic, creating winners and losers.

Even amidst a squeeze on incomes, consumers change tastes and behaviour. Hybrid working is now cementing some of those new patterns, disrupting city centre spending and travel. The pandemic has also left in its wake a continuing demand for companies that support health, vaccines and pets. Share prices for growth businesses have been reset, offering value to investors with a horizon beyond this year.

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