Your IndustryAug 24 2015

Investment styles - August 2015

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Approx.60min

    Investment styles - August 2015

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      CPD
      Approx.60min
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      Introduction

      By Ellie Duncan
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      In truth, it can be difficult to remove sentiment from such decisions. Remaining rational when parting with money can be extremely challenging.

      Theories abound on the differing investment styles that can be adopted. Veteran investor Warren Buffett is an advocate of value investing and has built up a huge amount of wealth based on this approach over the years.

      Jason Broomer, head of investment at Square Mile Investment Consulting & Research, suggests value companies can be identified by either having profits, sales or assets trading at below-average market multiples.

      “There is plenty of empirical evidence to suggest that stocks priced cheaply in the market outperform over the long run. But such a journey can be bumpy and typically a proportion of the companies will either slowly shrivel and die, or collapse more spectacularly,” he says.

      Clare Hart, manager of the JPM US Equity Income fund, describes herself as a value-focused investor who looks for “modest yielding stocks” rather than the highest yielders.

      In a recent note, she explains: “I tend to focus on a sweet spot of dividend yields of between 2 per cent and 4 per cent because I want to see a healthy dividend that is well covered and supported by strong growth. I’m looking for quality companies at reasonable valuations that can offer both income and capital appreciation.”

      But Ms Hart admits: “The market hasn’t always rewarded this style of dividend investing, and that has been the case recently as market leadership has tilted towards growth names in 2015. Investors’ preferences have been for lower-quality, higher beta names, particularly those names not paying dividends.”

      Fund managers who invest based on the central tenets of behavioural finance include Georgina Brittain, manager of the JPMorgan Smaller Companies Investment Trust, and Jeremy Lang, who runs the Ardevora UK Income and Global Equity funds.

      Ms Brittain, who also manages the JPMorgan Mid Cap Investment Trust, invests using a framework that focuses on earnings momentum.

      Another well-recognised style is growth investing. Mr Broomer says: “Growth companies can generally be defined as businesses that are projected to grow ahead of the rate of GDP growth [in their countries].

      “Growth companies tend to perform best when investors are prepared to have long-term horizons. Typically, such stocks tend to do well as the investment cycle is reaching a peak.”

      But investors may want to establish how much risk they are prepared to take before deciding which approach, if any, works best for them. Or they might want to consider using a combination of investing styles, such as growth and value strategies.

      Mr Broomer advises: “It is important to recognise that these main style groupings are not mutually exclusive. It is quite possible for a share to have growth and value characteristics, though this would be fairly unusual.”

      Ellie Duncan is deputy features editor at Investment Adviser

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