A source of consistent debate over my career has been investment styles. As many investors know, there is no singular way of managing money. Each investment manager will define their process in a way that they believe maximises the chances of long-term success.
Here are a few of the main investment styles:
- Value – this style of investing typically pays less attention to the underlying quality of companies invested and more attention to price. It works on the assumption that share prices of companies seeing short-term difficulties are overly punished relative to their long-term prospects. A greater emphasis on the value of an equity tends to lead to lower valued areas of market, such as financials and commodities.
- Growth – this style of investing works on the principle that markets are short-term in their approach to investment and that because of this companies with durable and long-term growth prospects are not appropriately valued. Investors with this style tend to invest in higher valued areas of the market, such as technology.
- Momentum – the principle behind momentum investing is that shares going up are more likely to continue to go up and those going down are more likely to continue a downward path. Momentum investors pay less attention to the fundamentals of the companies they own, and more attention to their share prices. There is no inherent sector bias in this approach; whatever is going up will be bought until the trend changes.
- Contrarian – this style of investment has some commonality with value investing, however, it is subtly different. Contrarian investors work on the basis that when there is consensus opinion about a stock or issue, this will then be reflected in the relevant share price. At the point a consensus opinion forms, contrarian investors take the opposing view. A recent example of this would be the impact of tariffs, where in April the view was this would inevitably cause a recession, and they didn’t. Contrarian investors would have bought into the post liberation day equity market sell-off and done very well. These types of investors will go wherever they see a cheery consensus.
“At the point a consensus opinion forms, contrarian investors take the opposing view.”
What style to follow?
Like supporting sports teams, investors tend to choose one of these approaches and stick to it. Is this correct though? Does one investment style have an inherently higher probability of success than another?
There are certain truisms in investing. Nothing is binary and everything is cyclical being two of them. Investors can offer talk about value versus growth, the US versus China, active versus passive in a way that implies only one side can be correct. This is a false premise.
“There are certain truisms in investing. Nothing is binary and everything is cyclical being two of them.”
Lessons from history…and today
Over my career, I’ve seen prolonged periods of time when all these approaches have worked well. In the 2000s value investing was the best way to construct portfolios; in the 2010s it was growth. Contrarian and momentum investing have had pockets of success throughout. What determined the success of each approach was a mix of variables which inevitably change over time. These can include trends in business and industry; interest rates; valuations; and geopolitics.
The 2020s have seen more of a mix of style effects than the 2010s. The decade started off with strong growth credentials, up until 2022 when a change in the interest rate environment and geopolitics resulted in a value market. Just as this change seemed set to continue, AI returned the market back to being more growth orientated. This year we have begun to see a shift back to value, somewhat hidden by the strong performance of the AI-supercharged large US technology companies.
“This year we have begun to see a shift back to value, somewhat hidden by the strong performance of the AI-supercharged large US technology companies.”
This volatility of style effects has been problematic for active investors. In the 2010s, there was a clear correlation between owning growth companies and good investment performance. Should that correlation reduce, some investors will have something of an identity crisis. If we look within markets today, what is performing is a mix of value investing and ultra-high growth investing, with the middle ground of growth at a reasonable price struggling the most. All quite confusing!
How should investors respond to this?
To some extent, the traditional delineation between value and growth has become less useful. There are value and growth stocks performing currently. The challenge therefore is to have an investment approach which is coherent and can transcend different styles. This can be done by investing across the corporate life cycle, as our global and regional equity teams do, thereby ensuring balanced exposure across all opportunities. It can also be done in more growth orientated strategies, such as sustainable investment, by ensuring stock selection criteria allow opportunities to be found in all areas of the market, subject to sustainable criteria.
What should be clear to all investors is we are in a different investment environment and that implies an evolution of thinking. This does not mean core foundational principles of investing have to change, but their application may need more mental flexibility. The correlation between owning good quality companies at reasonable prices and long-term investment returns is unlikely to have ended. It may however only be one tool in the toolkit going forward.
For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.
The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied.