As Growth Investing gathered momentum during the pandemic will this be the ‘new normal’?

10 August 2020 – CAMRADATA has published a new whitepaper on Growth Investing, which discusses the continued interest in Growth Investing and asks whether the ‘new normal’ post-Corona will be different for the decade-long triumph of growth investing. Experience

The whitepaper includes expert insight from guests who attended a virtual roundtable hosted by CAMRADATA in June. Participants included Seilern Investment Management, Walter Scott, BlueSky Group, Hymans Robertson and Lane Clark & Peacock.

CAMRADATA highlights that the Growth style of investing showed pronounced momentum in May as investors moved away from value and blended funds investing in US and UK equities, towards growth funds investing in the same markets.

Whilst this shift was not new, it is a pattern that takes place against a backdrop where investors bought strongly during the immediate dip following the outbreak of Covid-19, seemingly taking comfort from economic forecasts by central banks and the International Monetary Fund that predicted a strong recovery for 2021.

Sean Thompson, Managing Director, CAMRADATA said, “Since 2007, the Growth style has handsomely outperformed Value. In spite of the Cassandra calls of a bubble, led by major tech stocks, a reversal is yet to materialise, even with a recession unfolding.

“By mid-May forward price-earnings ratios for the Russell 1000 Growth index were 27.8x versus 19.2x for the Russell 1000 Value index. Over 25 years, Growth funds have delivered an average 1,072% versus 624% for Value funds.

“Our panel discussed their feelings towards growth investing and what impact the Coronavirus may have on the future of this investment style as the global markets face increasing uncertainty.”

Key discussion points included how economic activity has picked up from lockdown lows, but with the experts warning of fragility in business models which could lead to a shakeout across the corporate landscape over the next couple of years.

The panel then discussed Growth compared with Value investing, and considered how to get Value going again, before the conversation progressed to why it was becoming harder even for stable, successful active equity managers to win business from occupational pension funds?

Key takeaway points were:

  • The panel expect tough times ahead for markets, despite the last three months having been kinder to investors than almost anyone dared hope.
  • Whilst there is a huge valuation discrepancy between Value and Quality Growth, with Covid-19 likely to stay in some form or other, one panellist said they wouldn’t be surprised to see the valuation gap between Growth and Value remain intact or widen even further.
  • Several Quality Growth stocks are well-positioned to benefit from themes and trends caused by Covid-19 such as working from home. The sectors profiting from this are Communication Services, IT and Healthcare; and stocks in these sectors tend to have a growth bias.
  • One panellist noted that when the economy in general improves, Value stocks do well. Banks benefit from rising interest rates although rising rates with stagflation would be bad for them.
  • Another said there are potential catalysts for a pick-up in Value but that it was important to remember that styles come and go, while also reiterating that it is investing through the cycle, and over multiple cycles, that really delivers for clients over the long term.
  • Asked why it was becoming harder even for stable, successful active equity managers to win business from occupational pension funds, the consultants suggested that their maturity and regulatory nudges into lower-volatility assets were major causes.
  • The final point was there was plenty of evidence from the CAMRADATA roundtable of short-termism in investment decision-making, which does not only apply to consultants. It turns out that investment boards are inclined to focus too much on the short term as well.

The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:

  • Seilern Investment Management: ‘Discounting quality growth’
  • Walter Scott: ‘Where next for equity markets?’

To download the Growth Investing whitepaper click here