Diversification can be achieved by investing in differing styles and ‘growth’ and ‘value’ styles come in and out of fashion depending on market and economic conditions. Here, Kate Marshall, Lead Investment Analyst at Hargreaves Lansdown, suggests three fund parings to balance style.
Diversification in an investment portfolio comes in many forms. It can be achieved through different types of assets, like shares and bonds.
It can be geographic, through investments in different corners of the world. And if you’re focusing on investing in shares, diversification can also come through ‘style’.
Just as some countries will perform better than others at times, the same is true of styles. Growth and value styles will come in and out of fashion, depending on broader market and economic conditions.
Essentially, growth investing focuses on companies that are expected to grow earnings faster than others.
This could be due to development of a new product or a dominant position in its market.
Value investors look for shares in companies at a price less than their true worth.
It might be that a company has missed a target, or that the sector in which the company operates is currently out of favour.
The idea is that once things improve, the share price will rise.
These two styles typically perform differently under different conditions. For example, value companies tend to perform better when the economy is weaker or soon after a recession when the economy is improving.
These companies can be more mature, and some have more stable earnings if they are well established, so tend to be less affected when consumer spending falls.
Financials and utilities fit this definition well. That said, highly economically sensitive businesses might struggle in the depths of an economic crisis.
On the other hand, growth companies might perform better when interest rates are lower. It’s cheaper for them to borrow money to finance research and development or expand to new markets.
This part of the market typically contains more tech companies. But the point is they perform well at different times, offering true diversification.
Fund pairings to balance style
One way to invest without being exposed to differing styles is to invest in a tracker fund.
These aim to track the performance of a particular market by investing in most, if not all, of the companies in that market. Tracker funds also offer a low-cost way to invest.
Active funds try to perform better than a stock market by actively picking individual stocks.
Active funds with a distinct style will naturally go through periods of underperformance when their style is out of favour.
But they can still add value through stock selection – investing in companies that go on to perform well regardless of their country, sector, or style – particularly over longer periods.
Here are three pairs of growth and value funds from our Wealth Shortlist we think could pair well as part of a diversified investment portfolio.
Investing in these funds isn’t right for everyone and investors should only invest if the fund’s objectives are aligned with their own.
Japan
Man Japan CoreAlpha is managed by a team of contrarian investors led by Jeff Atherton. The team invests in larger, more-established Japanese companies that are currently out of favour.
Baillie Gifford Japanese is managed by experienced investor Matthew Brett. It invests in companies at different stages of growth, but each must have an adaptable or durable enough competitive advantage that the manager believes could help them deliver growth over the next 5-10 years.
Emerging markets
Invesco Global Emerging Markets invests in companies across a range of emerging economies. The fund managers are contrarians, looking for out of favour companies whose shares are priced lower than they believe they should be.
The lead manager Charlie Bond has been part of the Asia & Emerging Markets team at Invesco since 2012. He’s supported by deputy manager Matt Pigott, and experienced investors William Lam and Ian Hargreaves.
JPM Emerging Markets invests in high-quality companies the managers believe can sustain earnings growth over the long term. They consider the financial strength of a business, the quality of the management team, and the level of corporate governance.
Leon Eidelman has been the fund’s lead manager since 2016. He’s supported by co-managers Austin Forey and John Citron.
Global
Lazard Global Equity Franchise has been managed by four experienced investors since launch in June 2015. The fund uses a distinct value investing style which means it can often look different to both the broader stock market and even other funds in the Global sector.
The managers invest in companies they feel have a strong competitive advantage, predictable earnings, and robust balance sheets.
Rathbones Global Opportunities invests in companies from around the world. James Thomson has managed the fund since 2003 and looks for companies with strong competitive advantages that have potential to grow their earnings over the long term.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: pie chart, investing, diversify,cht-gsml-q21XvpB7uQU-unsplash
