The past 12 months has provided an interesting short-term phenomenon where Covid-19 accelerated the flight to online shopping and remote communication technologies and food delivery services.
Many growth managers exposed to these stocks performed well. On top of this, many value managers have also done well on the back of the underpriced asset opportunity since the market tumbled about 30%.
This all begs the obvious question, should investors and advisers tilt toward value management given the apparent ‘time in the sun’ they are enjoying, or focus on growth style firms that have generally outperformed over the past 10 years?
It’s hard to argue with the above data, but recency bias is a powerful motivator. We know that value management traditionally performs well through periods of increasing economic activity and potentially rising inflation, yet this is not what we are seeing globally, in spite of the excessive central bank stimulus in the wake of the pandemic. Pundits generally agree this is mainly due to the nature of the government spending, which has largely been targeted at welfare and job security rather than economic stimulus and infrastructure. The velocity of money in respective economies has been falling and there appears structural headwinds to the reflation story which would otherwise benefit value managers. This would suggest betting on growth managers may be the sensible option, and as we are conditioned to expect, the cycle always turns right? Perhaps, but any assumption that we are just in the regular economic cycle that favours one investment style than the other may be flawed thinking.
It is hard to see economic activity increasing significantly in the medium term, and any expectation that it will underpin a sustained period of broad growth is very unlikely. Even more so, consumer demand is not bridging the excess in production capacity.
As we noted, 2020 delivered outstanding results for some pure growth managers that were heavily tilted toward quick growing but often low profitability stocks, as borne out by the graph below.
It is hard to believe such results will continue given the multiple many of those stocks are now trading on. So there may be a risk in aligning your portfolio with pure growth stocks focussed on sales acceleration, over sustainable growth and profitability.
Searching for the highest growth stocks based on sales uplift is not how Insync approaches stock selection.
“We invest for longer duration than most managers, and our sustainable growth metrics are second to none. This is almost entirely due to our focus on global megatrends” said John Lobb, Senior Portfolio Manager at Insync Funds Management.
Mr Lobb suggests that it is not purely a choice between value managers or growth managers. The decision is more nuanced than that. “There will be winners and losers from both styles, and the firms most likely to succeed long term through challenging economic times are those positioned for the long term”. Pure growth firms focussing on short term sales expansion will likely be most affected by a market correction, what went up exponentially must surely come down at some point as investors once again make more secure stock choices.
Insync strongly have the view that robust, highly profitable businesses that are congruent with the global themes driving the accelerated changes around us will do the best. Investors should consider leaning toward defensive or sustainable growth and quality based managers today, which is a much better option given the uncertain economic times ahead.
Disclaimer
Equity Trustees Limited (“EQT”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.