Value investing versus growth investing is a decades old debate, one that has quietly raged since Benjamin Graham’s first ‘value’ stock picks in the early 20th century.
The traditional argument squares off two strategies in each corner of the ring, to fight it out over issues such as risk, valuation, investor temperament and global market forces. But is this fight still relevant? Was it ever a true contest at all?
In the red corner…
Depending on who you ask, ‘value investing’ is defined as seeking returns on relatively ‘low risk’ investments in stocks that are undervalued. For one reason or another, the market value of the stock does not reflect their intrinsic value. Value investing is tied in many peoples’ minds to low growth, often challenged, businesses that the myopic market has cast aside and put on sale.
By comparison, ‘growth investing’ conjures an image of savvy investors picking the next billion-dollar superstar in modern, high-tech sectors. The aim of growth investing is to pick companies that will outstrip their competition, growing at above average rates and rewarding their investors with their high performance.
Of course, as is always the case with such things, neither of these typologies quite hold. They are caricatures. This however has not stopped their proliferation across all areas of the investment world. Clients and allocators often reference such terms, whilst the press commentary is rife with the debate about “value” vs. “growth”. Even this author’s tongue slips from time to time and asks a fellow fund manager “are you more value or growth”?
Metrics Compared for MSCI defined Value and Growth Indices
P/E | P/BV | Sectors (Top 50%) | |
Value | 21.07 | 1.85 | Financials 21.5%, Healthcare 13.8%, Industrials 11.8% |
Growth | 43.74 | 7.05 | Information Technology 43.7%, Consumer Discretionary 17.4% |
*Source MSCI World Growth and Value Indices at 31 December 2020
‘Goliath versus Goliath’
The conversation around growth and value investing is dominated by the narrative of competition. Performance versus valuation, risk versus safety, us against them.
A recent AIC report entitled ‘Has value had its day?’ laments the widespread “cavalier references to the rivalry between growth and value investment styles” – but fails to address a fundamental issue. Value and growth investing are not two rival camps, spouting incompatible investment theses, divided by insurmountable ideological barriers.
“You haven’t given me a third option”
Asked in a webinar whether Asset Value Investors are value or growth investors, CEO Joe Bauernfreund responded that “we are neither”.
He could very easily have argued that we are both. Or that the question itself no longer makes sense.
“People think of us as value investors. To an extent that is true””
“We are interested in buying companies trading at a discount to their realizable value. But we are not interested in buying companies that are cheap for a reason – zombie business or operationally challenged companies”.
“We will not invest in companies where we don’t see the long-term potential for substantial growth in value.”
“We want to buy good quality companies trading at a discount, where we will benefit not only from closing the discount gap, but from long-term growth”.
The Third Way
So how do you follow this third way, treading between the two camps? Is it possible to find attractive quality companies, growing at above average rates but undervalued by the market?
Obviously, if these companies were easy to find then they would not trade below their intrinsic value for long. Companies in high growth sectors are under constant scrutiny by analysts and such an opportunity would be snapped up immediately.
But these companies do exist. Often hidden beneath ownership structures that obscure the value of the stock from easy evaluation. It requires time and effort to peel away the layers to see what is underneath.
A simple screening process will overlook the hidden value behind these sometimes complex structures and most analysts will simply miss them entirely.
Is it possible to find attractive quality companies, growing at above average rates but undervalued by the market?
If you unearth a company that incorporates the characteristics of both ‘value’ and ‘growth’, it can be complicated to understand at first glance. So, let us examine this with an example.
The Golden Eggs
Christian Dior (‘CDI’) – the French listed mono-holding company through which Bernard Arnault controls LVMH, the European luxury goods conglomerate – typifies the value-growth characteristics we seek.
Since the formation of the current group structure in 2017, CDI typically traded at or around NAV. However, during the COVID tumult CDI’s discount widened out to c.25%. AGT took advantage of this and built a position at a dislocated discount.
Reframing the “value” vs. “growth” debate as an analytical style, not a statistical factor, buying a company on a discount is value investing in its purest form – you are buying something for less than it is worth. At AVI we take advantage of situations where the discount widens, and invest at points of pessimism, earning a return once the discount narrows.
However, this is only part of the equation – the other side being growth. Through CDI we have exposure to LVMH, one of Europe’s highest-quality companies. LVMH owns a collection of unique brands with intangible qualities that cannot be replicated. This brand equity translates into high demand for their products, pricing power, and attractive margins and returns on capital, having compounded EPS at 14% since 2000. This is not the type of cigar-butt business you are likely to find in a so-called “value” investor’s portfolio.
This combination of unusual and unloved structures, and high-quality underlying assets, typifies that growth-value approach. We want to buy assets for less than they are worth, and then watch the assets grow in value.
Finding the balance
Value-growth investing is a nuanced game, relying on your ability, patience, and diligence to find that golden opportunity. A company that is undervalued by the market, but with long term prospects that would excite any hard-core growth investor is the archetypal ‘value-growth’ stock. Ardent value investors will claim it for their own, pointing at the fundamental undervaluation. Growth investors will retort that the value is in the long-term potential to outstrip the market. We are staking a claim to both.
Definitions:
P/E –The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share.
P/BV – The price-to-book ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
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AVI Global Trust – General Risk Factors
AVI Global Trust plc is a public company listed and traded on the London Stock Exchange. Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting your investment.
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AVI is authorised and regulated by the Financial Conduct Authority of the United Kingdom (the “FCA”) and is a registered investment adviser with the Securities and Exchange Commission of the United States. While the Investment Manager is registered with the SEC as an investment adviser, it does not comply with the Advisers Act with regard to its non-U.S. clients.
Intended Audience
The information on this website is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced on this website.The information on this website is subject to change without notice.
This website is primarily intended for UK residents. It is not intended for distribution to, or use by, any U.S. persons or persons in any other country where such distribution or use would be contrary to local law or regulation.
It is your responsibility to observe all applicable laws and regulations of any relevant jurisdiction.
No Tax or Legal Advice
Nothing on this website constitutes investment, legal, tax or other advice nor should it be relied upon in making an investment decision.
Money Laundering
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Full details are contained in the relevant subscription documents.
Investment Decisions
As with all financial or investment matters, you should exercise great care in using the information provided on this website or available through links from this website. You should research the facts, opinions and strategies mentioned in this website before making any financial investment decisions. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
No Warranty; Limitation on Liability
Whilst all reasonable care has been taken in the preparation of this website, AVI cannot guarantee the accuracy or completeness of such information, either expressly or implied. Neither AVI, any of its directors, officers or employees, nor any third party vendor, will be liable or have any responsibility of any kind for any loss or damage that you incur in the event of any failure or interruption of this site, or resulting from the act or omission of any other party involved in making this site or the data contained therein available to you, or from any other cause relating to your access to, inability to access, or use of the site or these materials, whether or not the circumstances giving rise to such cause may have been within the control of AVI, or of any vendor providing software or services support.
All information and content on this website is, subject to applicable statutes and regulations, furnished “as is”, without warranty of any kind, express or implied, including but not limited to implied warranties of merchantability, fitness for a particular purpose or non-infringement. We make no warranty as to the operation, functionality or availability of this website, that the website will be error-free or that defects will be corrected.
In no event shall AVI be liable to any indirect, incidental, special or consequential damages arising out of or in connection with the use of this website, the inability to use this site or any products or services obtained or stored in or from this website, whether based on contract, tort, strict liability or otherwise. These limitations also apply to any third party claims against users.
Intellectual Property
Everything on this website is the valuable intellectual property of Asset Value Investors Limited, or their respective suppliers. We protect our intellectual property rights to the full extent of the law.
Copyright Policy
No permission is granted to copy, distribute, modify, post or frame any text, graphics, video, audio, software code, or user interface design or logos.
Hyperlinks
The existence of hyperlinks should not be construed as an endorsement, approval or verification by AVI of any content available on third party sites. By providing access to other websites, we are not recommending the purchase or sale of products or services provided by the website’s sponsoring organization. We do not review any of these third party sites. AVI reserves the right to require written consent for, or request the removal of, any links to our website.
AVI disclaims all responsibility for the content of third party sites
Security
For your protection, we require the use of encryption technologies for certain types of communications conducted through this website. While we provide those technologies and use other reasonable precautions to protect confidential information and provide suitable security, we do not guarantee or warrant that information transmitted through the Internet is secure, or that such transmissions will be free from delay, interruption, interception or error.
You acknowledge and agree that users of this website and users, owners, or managers of third party websites may not: (i) collect or store personal data about other users of this website or (ii) upload, e-mail or otherwise transmit any material that contains viruses or any other computer code, files or programs that might interrupt, limit or interfere with the functionality of any computer software, hardware, database or file, or communications equipment that is owned, leased or used by AVI.
Privacy Policy
We encourage you to read AVI’s Privacy Policy which can be obtained by clicking the Privacy Policy button found on the Homepage.
General Terms
Deliberate misuse of any element of this website including, without limitation, hacking, introduction of viruses or similar code, disruption or excessive use or any use in contravention of applicable law, is expressly prohibited and we reserve the right to terminate your access to the website, and at our discretion, pass information to the legal authorities.
We reserve the right at any time on giving notice to change or modify these terms and conditions or to impose new conditions in respect of this website or to change or discontinue any aspect or feature of this website. We shall be entitled to terminate your access to this website at any time on giving notice to you and in any event if you commit any breach of these terms and conditions. We shall have no liability to you for such termination. Notices may be served by any reasonable method including posting on this website.
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These terms and conditions shall be governed by and construed in accordance with the laws of England without regard to conflicts of law principles. Nothing in these Terms and Conditions will exclude or restrict any duty or liability we may have under applicable rules or regulations.
AVI Global Trust – General Risk Factors
AVI Global Trust plc is a public company listed and traded on the London Stock Exchange.
Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting affecting your investment.
Applications to invest in AV Global Trust referred to on this Site, must only be made on the basis of the current Key Features Document, or other applicable terms and conditions. Past performance should not be seen as an indication of future performance. Market and exchange rate movements may cause the value of a fund to rise or fall and an investor may not get back the amount invested.
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Details are contained in the relevant application documents. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
By agreeing to these terms, you agree that we may contact you by post, fax, email, SMS messaging or by other forms of electronic media to inform you of our products and services that we believe you might be interested in.
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