Growth vs Value & Arrow's Approach
Investing in the share market can be a daunting task, especially for those who are new to the game. With so many different investment strategies to choose from, it can be challenging to know where to start. Two popular investment styles that investors often hear about are growth investing and value investing. Both styles have their unique characteristics and benefits, and investors should understand them before making investment decisions. In this article, we will explore the key differences between growth and value investing.
Growth Investing
Growth investing is a style of investment that focuses on companies that are expected to grow at an above-average rate compared to the rest of the market. These companies are typically characterised by high revenue and earnings growth rates, often driven by innovative products or services, expanding markets, or other factors that are expected to drive future growth.
Growth companies are typically found in sectors such as technology, healthcare, and consumer discretionary. These companies often reinvest their earnings back into their business to fuel further growth, which can lead to significant price appreciation over time. This means that growth stocks often have high price-to-earnings (P/E) ratios, which means that they are more expensive relative to their earnings compared to other stocks in the market.
One of the benefits of growth investing is that it can generate significant returns over the long term. However, it is important to note that growth stocks can be more volatile than other types of stocks, as investors are willing to pay a premium for the promise of future growth. This means that there may be periods of significant price declines, especially if a company fails to meet growth expectations.
Value Investing
Value investing is a style of investment that focuses on companies that are undervalued by the market, often due to temporary factors such as economic downturns or short-term negative news. These companies are often characterised by low P/E ratios, high dividend yields, or other metrics that suggest they are undervalued by the market.
Value stocks are often found in sectors such as financials, energy, and utilities. These companies typically have a long history of stable earnings and dividends, and investors often expect them to bounce back from temporary setbacks over time. Value investing aims to take advantage of market inefficiencies and buy stocks at a discount, with the expectation that the market will eventually recognise their true value, leading to price appreciation.
One of the benefits of value investing is that it can provide investors with a margin of safety, as the stocks are often priced lower than their intrinsic value. This means that there is potentially less downside risk, especially if the company’s fundamentals remain strong. However, it is important to note that value stocks may not provide the same level of growth as growth stocks, and may take longer to appreciate in value.
Arrow's Approach
Across the portfolio's we would exhibit a bias towards growth. Arrow prefers to employ managers who can capture structural trends which ideally deliver more stable and consistent earnings growth for investors as opposed to cyclical businesses which tend to be price takers where their profitability is driven by the economic cycle. These types of businesses are traditionally defined as quality. Quality companies generally have strong pricing power. This provides greater ability to have expanding profit margins whilst costs increase (Inflation), I.E costs can be easily passed on to the consumer. Quality companies generally also exhibit low debt, stable earnings & strong corporate governance but generally, they trade at a valuation premium to the broader market.
