Value vs growth – a real or false dichotomy

The authors of the content on this page from Sept 2012 to June 2017 are:
Market Commentaries: Gary Paulin, Ameet Patel, Paul Moran, Douglas Morton, Oliver Sherman, Ben Brownette, Rob Arnott, James Santo, Neil Campling
Research: Ameet Patel, Paul Moran, Douglas Morton, Oliver Sherman, Rob Arnott, Neil Campling

Our process usually starts with a theme or a driver and then works back to a stock. As such we don’t consciously adopt any one investment style in our approach to stock selection but as others do it’s important to be aware of the distinction.

Growth has been the predominant style for at least as long as QE has existed (arguably for longer as the discount factor has been falling for 35 years). Lower for longer has been the accepted mantra and the new-normal was for sub-par growth into the foreseeable. If growth stocks also generated consistent cash-flow they looked increasingly attractive vs. bond-yields. And of course, given low bond yields, the longer the duration their cash-flows were, the higher their PV.

Since the summer however we have been forced to consider an alternative narrative. As it’s been a while, I spent most of December re-acquainting myself with the writings of Buffett, Howard Marks, Jeremy Grantham of GMO and Baupost’s Seth Klarman. If I had to pick one who epitomises what I think is the true essence of value investing it’s Klarman. But what they all share is that they don’t buy stocks which are “cheap”, but look for securities trading at low prices relative their intrinsic worth, the difference being the so called margin of safety. The idea is complicated however by different investors using different assumptions and time horizons when calculating value. One man’s value stock can be another man’s growth stock (Buffett and Coke is the classic example). Indeed, one often finds Lipper statistics with the same stocks appearing in mutual fund lists for both Value and Growth. It seems investment style labelling is a pursuit beloved of the consultants. Simplicity sells, although I question whether the complex nature of markets truly avail themselves to such distinctions. Things are never that simple which is why we prefer to avoid semantics, stay balanced and just pick stocks.