Investment strategy

Growth is an investment style, analogous to an investment strategy. As a factor premia, it has its behavioural roots in the idea that people systematically underestimate (or underreact to) earnings growth, and the underlying drivers of that growth (a new product, gaining market share etc) and hence are continuously “surprised” by the outcomes.

Our favourite way of discussing the idea is related, but with better framing. Consider that there are only two ways a company can outperform the index. Either

a) the “true” earnings growth rate is higher (lower) than the market expects, or

b) the “true” earnings multiple is higher (lower) than the market expects.

That’s it. Gotta surprise somewhere.

Growth, as an investment style, has been on fire over the past few years (FAANG stocks) and particularly the COVID impacted era (with a shift to online activity and pandemic-related lows in interest rates, which disproportionately benefit growth companies).

This has come as a “richening” (a terrible word, but that’s the industry standard) of the price (average valuation) of growth relative to value.

The same is true, to a lesser extent, relative to other investment styles, like Quality (our own preferred style in direct equities is QGARP, Quality Growth at a Reasonable Price).

This record high of the spread in valuation between growth and value makes us wary of funds that are wholly or predominantly exposed to secular growth narrative stocks (everything from BRG, XRO, DMP domestically, through to Tesla, NVIDIA, and Amazon internationally), on a DAA basis...

…or, abstracting away from individual names, at the portfolio level, as proxied by the combination of high weighted average valuation metrics, high earnings growth, and low yields. Note that in the graph below, we cut the Y-axis off at c50x, meaning that measures of P/E, or P/S above that flatline.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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