What are the main styles of portfolio management? Growth and value

The investment management style consists of a (dominant) strategy that is translated into the allocation of assets within a portfolio. Growth and value are probably the best known.

The growth style of portfolio management

The growth investor's first step is to look with interest at companies that show or promise rapid growth, e.g. in earnings or sales. The companies favoured by growth investors are characterised by high growth rates and typically operate in sectors that project their value not only in the present but also in the future: the most classic case in this respect is technology stocks. Investors therefore believe that the value of the company lies in its future growth, and are willing to pay a premium for the promise of outperformance: the P/E ratio of these stocks is usually higher than the market average.

Advantages of the growth style

• Potentially high returns, capable of outperforming the average market.
• Support from trends or megatrends that can drive financial success.
• Resistance to market volatility if growth proves robust.

What to look out for

• Volatility risk: Because they have to base their value on their growth prospects, which are linked to demand or the cost of financing, growth stocks risk being more sensitive to economic cycles and market fluctuations.
• The risk of being overvalued, i.e. having already priced in their growth prospects and therefore being overvalued relative to their intrinsic value (fair value).
• In the worst case scenario, if the spread between the price and intrinsic value is really high, this can even lead to a price collapse.

The value portfolio management style

When an investor is attracted to securities that are considered undervalued relative to their real or intrinsic value, there is no doubt: the style is value. Value investors look for stocks that are undervalued by the market, but whose fair value has the potential to drive their price higher. They use specific metrics such as price-to-earnings ratios, price-to-book ratios and dividend yields to find these stocks for inclusion in their portfolios. Value stocks tend to be concentrated in sectors where consumption is well established but not overly dynamic; many are counter-cyclical in the sense that they do not correlate with economic cycles.

Advantages of the value style:

• Cheap stocks that can hope to rise in price over time.
• Intrinsic value, which makes them on average more resistant to market fluctuations (even more so when decoupled from economic cycles).
• Dividend payouts (if any), based on a solid and stable business over time.

What to look out for

• The risk of having to cope with prolonged periods of below-market valuations: this may mean that the real returns on the securities in the portfolio are lower than expected.
• The risk of misinterpreting intrinsic value and investing in companies that are indeed undervalued by the market, but whose growth prospects justify this.

Management styles are not mutually exclusive

Value and growth are investment strategies that are not necessarily mutually exclusive. On the contrary, investors can choose a complementary style - read: asset allocation - to achieve effective diversification, i.e. in line with their personal risk tolerance. However, this is often a complex operation and usually requires the help of a professional, such as an asset manager (who may offer a diversified product, such as a share in an investment fund) or a financial advisor.

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