Partner Content by Artemis

Style is not eternal

Capital at risk. This content has been prepared for professional investors only. All financial investments involve taking risk which means investors may not get back the amount initially invested.

  • For now, growth stocks, ESG stocks and positive-impact stocks are out of fashion.
  • On a price-to-sales basis, ‘emerging growth’ stocks are trading below their long-term average.
  • Innovative growth companies that can solve meaningful problems tend to create significant value for their shareholders over time.

Only one style is always in fashion

Believe last year’s narrative and the financial world is all about ESG investing these days. Yet just a matter of weeks into 2022 and that notion can be firmly put to bed: energy stocks are leading the market, followed closely by financials. Poor old growth stocks, which until recently were flavour of the month, are painfully unfashionable. Even defensives are coming under pressure. After years in the doldrums, meanwhile, value is enjoying the top spot.

Clearly, the majority of investors are interested in a particular style of investing. But that style is not buying growth, ESG stocks or positive-impact stocks. Although the rise of passive investing and style-factor ETFs has helped to reduce holding periods and increased volatility, the popular investing style today remains the same as it has always been: whatever happens to be working at any given moment…

Our style, however, doesn’t change. We believe in the ability – and necessity – for innovation to solve the many impact problems that exist today. So we invest in emerging-growth stocks focused on the future. Over the first few weeks of this year, this has not been a fun part of the market to be in. As my colleague Craig Bonthron recently explained, babies have been thrown out with the bathwater. But our style isn’t changing.

What caused this shift?

We all have a view of what caused this change in style, whether it be interest rates or inflation – and how those dynamics will play out. So I will spare you another opinion on those subjects.

What I would say is this: don’t underestimate the impact the pandemic had on the real world and on financial markets. The disruption it caused has been greater than any of us imagined. It brought forward the adoption of new technologies and, in the stock market, widened valuation differentials to levels not seen before.

We invest in ‘emerging growth’ stocks. These companies are growing quickly, are (re)investing in their own future growth and are too young to be regarded as ‘established growth’ stocks. During the pandemic, valuations of these stocks rose to levels not seen in the period since the financial crisis. Was that sustainable? My hope was that inflation would remain at manageable levels, that the path back to interest rate ‘normality’ would be a gradual one and that the rapid growth of the type of companies we invest in would allow their valuations to normalise without a large drawdown.

Clearly, however, that has not been the case.

Emerging growth stocks are no longer ‘expensive’

I don’t know when the underperformance of emerging growth as an investment style will end; nobody does. I don’t have a crystal ball and I can’t tell you what the next month, three months or even 12 months will bring in terms of our companies’ share-price performance. But what I can say with confidence is that this group of stocks is no longer expensive.