November saw a remarkable reversal in fortunes for the stock market. Energy stocks such as BP and Shell returned nearly 30% over the month, tech stocks, as measured by the Nasdaq index, returned less than 6% (and even less in sterling terms) and the FTSE 100 index was one of the best performing indices globally returning more than double its US tech-focussed peer. Many headlines boiled it down to ‘the great rotation out of Growth and into Value.’
Top performers in the fund over the month included Close Brothers, Compass and Burberry. Less impressive returns came from holdings such as Halma, Experian and Dechra Pharmaceuticals. The financial press would probably describe the former as ‘value’ and the latter as ‘growth’ stocks, however we find these terms overused and unhelpful.
Warren Buffett succinctly covered this point of view in his 1992 shareholder letter where he wrote about what he considered an ‘attractive’ investment. In it, he suggests that whilst many an investment professional thought that value and growth were styles in opposition and that any mixing of the two terms was “some form of intellectual cross-dressing”, he saw this as confused thinking and viewed these approaches as being joined at the hip. Buffett justified this explanation by offering the following definition:
“Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive” …whilst asking: “What is investing if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labelled speculation (which is neither illegal, immoral nor - in our view - financially fattening).”
In the emotional rollercoaster that is the equity market there will be times when investors ignore value and pay any price for high or sustainable growth. Equally, there will be times when investors disregard sustainable growth and bid up assets that trade at an apparently cheap price; November appeared to be one of these. We will continue to try to take a step back from these emotional swings by seeking to invest in high quality businesses that we believe can sustainably grow, but only where we are offered the shares at what we believe to be reasonable value.
When it comes to value versus growth, we think we see enough opportunities in which we do not have to choose.
James Godrich, Fund Manager
James manages JM Finn’s Coleman Street Investment funds
Please remember that your capital is at risk and the value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The views expressed are those of the author.