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Graph of the week

Graph of the week

07-12-2018 | Insight

Valuable growth

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager
Source: Thomson Reuters Datastream, Robeco

Equities trading at low valuations (measured by price-earnings ratio or book value) are called ‘value stocks’, while equities with above-average growth in revenue and earnings are known as ‘growth stocks’. This week's graph shows that I, as portfolio manager of a growth fund, have enjoyed a tailwind over the last ten years.

Central bank stimulus measures, falling rates and, in particular, the strong underlying performance of the companies themselves have resulted in a superior price performance for growth stocks. Since the 2008 financial crisis, value stocks have shown a structural underperformance compared with growth stocks. One of the questions most frequently asked by clients currently is whether the large outperformance of growth stocks has run its course.

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Contrived categorization

Now that interest rates are gradually rising, especially in the US, such questions are not really surprising. Is it time to move into value stocks? A legitimate and relevant question, but I would like to add an observation to this categorization. It seems here that we're talking about two completely different methodologies, while growth is simply one of many components – indeed sometimes a key one – used to determine the value of an enterprise.

Master investor Warren Buffett wrote the following on this in 2000:
“Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component – usually a plus, sometimes a minus – in the value equation.”

I'm still convinced that in the long run, investors will be rewarded by investing in equities that consistently show superior growth in revenue and earnings. Which is why I focus primarily on finding enterprises that are well positioned to create value for investors. To be honest, how these companies are categorized is less important to me.

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