Weighing up value and growth
What's the difference between value and growth investing, and how can you incorporate these investment factors into your portfolio?
Most investors in share markets seek both value and growth.
By seeking value, the objective is to find companies whose shares appear to be underpriced (cheap) relative to their earnings and growth potential.
By seeking growth, the objective is to find companies whose shares are expected to grow rapidly in recognition of their potential to increase earnings substantially.
The problem is, growth companies tend to be relatively expensive when compared to value companies because their shares are already on a growth curve.
Value companies are the opposite. Their shares are below fair value, usually because the conditions they need to thrive haven't yet materialised.
The last decade has been relatively challenging for value investors, because cheap (in value) companies have generally underperformed growth (expensive) companies.
Why has that been the case?
The answer largely comes down to the prevailing economic environment over the last 10 years. It was characterised by relatively low economic growth and record low interest rates.
In this type of environment, many investors gravitated to high growth-potential companies in search of future growth, including companies that have been spending most of their cash flow and not currently generating profits.
That's because the low interest rates available had given them the funding ability to grow their businesses significantly in order to generate higher profits down the track.
Over the last 12 to 18 months however, global economic conditions have shifted and they're continuing to do so.
The devastating impact of the COVID-19 pandemic over 2020 and 2021 forced governments around the world to introduce funding programs to help stimulate business activity and consumer demand.
Those activities have turbocharged global economic growth and have been a key factor behind a rapid surge in inflation levels. This, in turn, has already led some central banks to start lifting their official interest rates to dampen inflation.
This current economic environment is expected to favour the value stocks currently generating profits.
But it's expected to be less favourable for growth stocks, because higher interest rates are likely to diminish the value of their future potential profits.
Investing in value and growth
Both value and growth are two well-defined investing factors that influence the market performance of every company to greater or lesser degrees.
And it's relatively easy to invest in these and other factors through specific managed funds and exchange traded funds.
Factor-based funds use a rules-based actively managed approach to invest in companies that exhibit the specific characteristics aligned to their underlying factor strategy.
In doing this they essentially filter out companies that don't meet their particular investment criteria. Depending on the factor strategies chosen, they can deliver investment returns that are superior to the broader market over the long term.
These types of funds can be used to calibrate a portfolio through exposures to one or more factors, or as a total portfolio strategy to manage investment risk.
The key role of factors
Many investors used index funds as the core building blocks of their portfolio and complement their core equities holdings with satellite investments in factor-based funds.
Factors are academically tested drivers of long-term investment growth, and factor-based funds use systematic, logical and repeatable quantitative processes to stay true to the factors they've been designed to track.
Factor-based investing represents a dynamic tool designed to help investors achieve specific investment goals with even a modest allocation.
For example, they can target factors to seek outperformance, maintain equity market exposure while reducing volatility, or offset an undesired exposure in their portfolio.
Ultimately, whether you pick value over growth, or growth over value, comes down to your investment style and approach.
As with any type of active investment strategy, the essential elements remain talent, cost and patience.
The investment talent behind the development and implementation of a factor-based product strategy will be key to its long-term performance. So will cost. The lower the management expense ratio, the more you get to keep out of your total returns.
Direct targeting of factors through factor-based funds can offer the many benefits of traditional active fund investing but at a lower cost and with less manager risk.
But patience should not be overlooked in factor strategies. Factor timing is extremely difficult, and strategies that attempt to do so are ill-advised.
You therefore need to have patience over the long term to stick with a factor-based investment strategy.
Tony Kaye
20 Apr, 2022
vanguard.com.au
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
April - June 2022 archive
- Talking money with a partner
- Make the most of these super opportunities before June 30
- ATO flags changes to TBAR reporting
- RBA rate rise spurs mixed response from SMSF lenders
- World GDP Ranking (1960~2025)
- Work test changes open up TBC strategies for couples
- Using trusts: Keeping it in the family
- SMSF account openings shift from self-directed to advised clients
- ATO ramps up identity fraud detection for new SMSFs
- ATO ruling may offer solution to NALE issues
- Largest cities in the world 1500 to 2100
- Investors are becoming more ethically conscious
- Weighing up value and growth
- How advice gets you closer to your goals
- Federal budget 2022: Winners and Losers
- Government intervention in super a ‘low priority’ for consumers
- ATO upgrades Online services for SMSF auditors
- Constructing a portfolio using investor profiles
- Investing for a house deposit
- Where self-managed super funds are investing
- SMSFs warned on NALE uncertainty
- Federal Budget 2022 – Overview
- Federal Budget 2022 and YOU - Part 1
- Federal Budget 2022 and YOU - Part 2
- Budget at a glance - Video