Growth vs value in uncertain times

In uncertain times, investors often question the best approach for their portfolio. The debate between investing in growth or value often comes up during uncertainty, particularly when certain aspects of growth investing may directly benefit from market volatility.

I recently spoke to Tom Schubert, Managing Partner and Portfolio Manager and Alex Cathcart, Portfolio Manager, from Drummond Capital Partners about growth and value investing in the current uncertain market environment.

The market outlook

Drummond Capital Partners have developed three potential scenarios for the future, each dependent on whether certain events occur.

Mr Cathcart says, “It has a lot to do with the interaction between fiscal and monetary policy, and what that means for the path of debt, both household and government, and ultimately what it means for inflation.”

Scenario 1

Future scenario one is high inflation and is based on the potential of a Democratic win in the US, including the Presidency and the Senate. In this scenario, Mr Cathcart suggests that there would likely be policies enacting trillions in government spending, financed by the US Federal Reserve. Eventually this activity would lead to higher inflation.

Scenario 2

Scenario two is the middle ground where effectively markets act as they’ve acted for the past 10 years. “In that world, interest rates remain very low…You’re likely to see fiscal austerity coming out of that, which is quite damaging to growth,” says Mr Cathcart.

Scenario 3

The third scenario assumes low inflation in an environment Mr Cathcart compares to the economic situation of Japan.

He says, “most big developed economies have ageing and old populations. Interest rates just continue to fall. Growth is low…You can have more deeply negative short-term rates than we currently do. In that world, it’s a world of low growth deflation.”

Of the three scenarios, Mr Cathcart says the chance of the first has become slightly elevated nearing the US Federal Election. You can read more insights on this here.

Investing for the scenarios?

Many investors tend to fall into either of two camps – value or growth.

“Value investors are essentially seeking to buy stocks which are undervalued relative to their intrinsic value today and they’ll use valuation metrics, such as price to earnings or price to book ratios… tend to focus more on revenue and earnings growth and are generally looking for industries with larger addressable markets, you know, long runways for growth. They’re often prepared to pay higher valuations today for that long-term earnings potential,” says Mr Schubert.

Given the evaluation metrics used, certain sectors tend to dominate certain styles. For example, value investments tend to be dominated by financials and industrials while technology and communications generally fall more under growth investments. For example, investments like ETFS Morningstar Global Technology ETF (ASX: TECH) or ETFS FANG+ ETF (ASX: FANG) generally fall under growth investments. Which style performs better is often influenced by where we are in the economic cycle.

“Value tends to outperform when economic growth is accelerating. Growth tends to outperform when you have a period, such as the last decade, of low economic growth, low inflation and therefore low interest rates,” Mr Schubert says.

“Our research suggests that the most common macro factor, relating to the relative performance between growth and value, is interest rates,”

Drummond Capital Partners tend to be style agnostic, pivoting their portfolios based on their current views, conscious of the macro environment and the potential for different scenarios, each with different interest rate levels.

Mr Schubert says, “we have held a long-term overweight position to global growth equities and it’s really benefitted our portfolios. We did reduce this slightly… we're sort of sitting back with that cash we took off the table, and really watching, as Alex had started to talk about in terms of the U.S. election, what that potentially means from the fiscal standpoint, and if indeed we should be making the portfolio slightly more style neutral or indeed, you know, pivoting to value.”

Blending investments

Drummond Capital Partners use a combination of passive and active investments in their portfolios, viewing it as offering a higher hurdle point for active investments and allowing them to back their views with solid investments on the passive side.

“Passive is not a bad way for us to express some of our tactical views that tend to be cheaper and more liquid in terms of access… we combine that with some good core long term growth managers and sector-specific managers, particularly in fixed income,” says Mr Schubert.

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