In equity investing there are many different strategies available to investors to choose from when allocating. We can pick specific regions, like European or North American equities. We can choose between actively managed vs. passively managed strategies. We can even pick specific sectors or trends to invest in, for example, an equity fund strategy that only invests in stocks linked to renewable energy, or to artificial intelligence.
These strategy choices are usually mutually exclusive. If we decide to allocate investor capital to an emerging market equity fund, then we would expect no US stocks to be included in that strategy. Similarly, a passive fund investment, by definition, has no active human involvement in stock picking, the passive strategy only invests according to the relevant index.
Two of the most important and widely used equity strategies available to investors are: (i) growth investing, and (ii) value investing.
Growth investing is a strategy based on investing in stocks with underlying businesses that are growing at a much faster rate than the broader economy, and typically also growing faster than the average stock in a major index like S&P 500 or Euro Stoxx 600.
Value investing is a strategy focussed on buying equities trading on low valuations, typically much lower than the average of a major market index, where there is perceived to be a ‘mispricing’ by the market. When buying stocks using a value methodology, the investor is taking a view that the current market price for the stock is much lower than the real underlying value of the business.
Generally, growth and value strategies are considered mutually exclusive, like our earlier examples. In fact, the entire professional investment industry thinks this way. Major pension funds, for example, when allocating their investor capital to equities will often split their equity allocations between ‘growth’ and ‘value’ equities, just as they will split allocations between ‘European’ and ‘US’ stocks.
This entrenched way of thinking in the investment industry is interesting to us, because we think it opens up an opportunity to do things differently and offer investors something unique.
We believe that growth and value strategies are not, necessarily, mutually exclusive. It is possible for a stock to exhibit the characteristics of both!
Imagine a company that owns a powerful digital advertising business, which has seen exceptional growth over the past decade. As traditional advertising continues to migrate to the digital world, via targeted advertising, this company’s leading platform is the first choice for many marketing teams increasing spend on digital adverts. This same business, because of some short-term concerns around the economy, sees its stock sell-off by 75% in one year, during a broader market sell-off in equities. After this the stock trades on an earnings multiple (a measure of valuation) of just 8x, half the valuation of the market index average.
This example company is exhibiting the characteristics of a growth stock, given its high growth digital advertising business and the likely prospect that it continues to grow for many years to come. But it also exhibits the characteristics of a value stock, given the very low valuation it trades on relative to the market and relative to the quality of the business.
The example we gave is a real investment in two of our investment funds at Dominion, and after buying it at these depressed valuations, it has increased in price by c. +100%.
Growth and value do not, we believe, have to be thought of as mutually exclusive. Investors do not necessarily have to choose between them. It is possible to have the best of both worlds, to ‘have your cake and eat it’, and invest in companies exhibiting the desired characteristics of both growth and value strategies.
This is exactly the approach we take at Dominion to the Global Trends strategy, led by the Global Trends Managed Fund. We search for stocks offering investors the best of both worlds, companies with high quality businesses that are growing, while also trading on valuations that are especially attractive and offer significant upside.