InvestmentsJul 26 2013

Growth vs value: Choosing the right strategy

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      CPD
      Approx.40min
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      CPD
      Approx.40min
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      pfs-logo
      cisi-logo
      CPD
      Approx.40min

      Year in, year out, there is an increasing amount of regulation put in place for advisers. IFAs now need to prove everything to the regulator, from exams to become chartered to proving why you make the investment decisions you do.

      It is hard to know where to start considering there are more than 30,000 funds in the UK unit trust universe. One possible starting place is to look at a fund’s strategy.

      Each approach suits a different type of investor or target. Funds tend to fall into two main strategies: growth and value. A growth investor typically seeks capital appreciation over the long term, whereas a value investor looks for bargain, out of favour stocks that have low prices in relation to earnings.

      Many fund objectives can be full of jargon and difficult for the everyday investor to understand. So before you start to pick the right vehicle, you need to first understand what exactly goes into the strategy of each type of fund.

      Value

      Value funds tend to invest in the more unfashionable companies using a basic principle of looking for those with a low price to earnings (p/e) ratio.

      Kevin Murphy is part of the Schroder value team and co-manages the Schroder Recovery, Income and Specialist Value UK Equity funds alongside Nick Kirrage. He says, “Every academic study that has been done shows value outperforms the market. I am unaware of any study that shows it doesn’t.”

      If this is the case, why are there not more value investors out there? A quick search shows there is more than five times the amount of funds with the word ‘growth’ in the name than ‘value’.

      But why is the strategy so overlooked if it has been academically proven to gain better results than other investment strategies?

      “While intellectually, value is not difficult, emotionally it can be extremely hard,” Mr Murphy says.

      A lot of investors, whether professionals or advisers’ clients, will look at the companies a value manager will invest in and turn their noses up, he adds. For Mr Murphy, there are only a few things you need to be a value investor. Mainly you need to have patience and a contrarian streak to be able to withstand the “pressures to be part of the consensus”.

      “To be a successful value manager, it is a necessity to be able to buy those companies and have the patience and fortitude to give them the time and operational requirements to make the share prices go up,” he says.

      As Warren Buffett, probably the most famous value investor, said, “Price is what you pay. Value is what you get.” But what is value investing?

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