It’s no surprise that in an ever evolving and complex world where people are constantly overloaded with new information, our natural human tendency is to search for simplicity. We’ve seen this evolve in the investment world as much as anywhere else with many investors now having a single focus when looking at stocks.
This seems most apparent in the ongoing debate about value vs growth. To us, it appears that investors see simplicity in being able to label stocks as one of these two categories and make their investment decisions on that basis. What intrigues us is not why people choose to invest in a stock because it’s considered either growth or value but why people believe these two characteristics should be mutually exclusive.
On many occasions we’ve been asked the question “as a value manager, how have you managed to beat the market when growth has outperformed by so much?” Do we cheat or bend the rules? Not at all, our approach is designed to ensure we only invest in the cheapest stocks in the market.
The simple answer is that we don’t consider value and growth to be mutually exclusive concepts. The difference, as we see it, is the amount we are willing to pay for future growth. We usually prefer not to pay anything; while Growth investors often end up overpaying as demonstrated in the chart below.
The big misunderstanding, we believe, is that just because we won’t pay up for growth, that doesn’t mean we don’t get to invest in ‘growth’ companies. For example, one element of our investment process is our view that money spent on research & development is an investment rather than just an expense which has pointed us to numerous ‘growth’ opportunities that are missed by many traditional approaches to value.
A strong valuation discipline naturally steers us to companies that are deeply unfashionable, but we are regularly surprised by some of the hidden gems we find in these companies, as well as how the market can lose perspective once it gets hold of a narrative.
Seven years ago we purchased UPM Kymmene, a stock many widely regarded as a structurally declining paper company caught in the shift to a paperless society. We saw a company that also had unique access to fibre and the opportunity to play the Chinese consumer growth story as the demand for packaging and paper soared in a country with limited resources.
As is often the case with ‘value’ stocks we felt investors were discounting the negatives without attributing value to the potential positives. To us the case was simple. Whether future growth in one market would fully offset the decline in other areas was somewhat irrelevant – by investing at such a low price we were getting any future growth opportunities for free.
We’ve had many examples like UPM whether it be investing in traditional ‘growth’ sectors such as healthcare and information technology, accessing emerging markets growth or capturing the inevitable rebound in German defence spending.
The world is a complex place, but also a surprising one. Patient investors can access structural growth in surprising and profitable ways if they’re just prepared to look past the label.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.