Yet, so often when we think of growth investing we often think of growth companies – those that have the potential to grow their earnings much faster than average. Often the price we are asked to pay for that potential is much higher than the market average, too, which is a bad place to start – because, as James Norrington explores on page 30, when market valuations are high subsequent returns often tend to be lower. That’s because the earnings growth we need to justify that valuation simply doesn’t materialise. Perhaps, instead, a better way of defining growth companies should be simply those that don’t pay a dividend, because their managements think they can create more value by reinvesting cash. That is a belief that needs scrutiny, though – all the evidence suggests the compounding effect of reinvested dividends is responsible for a large chunk of market returns; understanding how management can turn investment into cash flows requires rather more subjective assessment, and is hard work.
There are other reasons why companies may be demonstrating rapid earnings growth. Perhaps they’re in recovery mode or operate in a cyclical industry in the midst of an upswing (would you call housebuilders growth companies?). Such investments could deliver capital appreciation, but in many other respects are closer to value approaches – one variation of growth investing, GARP, or growth at a reasonable price falls into this category. You will often find many things that don’t resemble growth stocks in the portfolios of growth-oriented investors. That’s certainly true of one of our speakers, John Baron, whose high-performing growth portfolio featured in our magazine contains everything from income funds to property to high-yielding infrastructure. Rather than chasing growth stocks, dividend reinvestment and asset allocation do the hard graft.
On the subject of John Baron, I can confirm that, as I hinted in a recent podcast, we will be running a dedicated event in February built around his portfolios. Getting it to happen has proved trickier than organising a heavyweight title fight, but planning is under way and it promises to be an enlightening evening. We will bring you further news in due course.
