Growth or Value Investing
Investors must consider whether they prefer to invest in fast-growing firms or under-priced industry leaders. Each will have varying risk and return characteristics and will perform differently at different times in a market cycle. Investors must determine which strategy best suit their individual needs.
The growth style of investing looks for high-quality companies that have high earnings growth rates, high return on equity, high profit margins and low dividend yields. There are however no guarantees going forward. Companies that have all of these characteristics are often innovators within their field/industry and make lots of money. It is thus growing very quickly, and reinvesting most or all of its earnings to fuel continued growth in the future.
The value style of investing is focused on buying strong companies at reasonable prices. Their price however has fallen due to the company or industry falling out of favour with investors or perhaps the economic cycle not favouring a particular industry at that point in time. Investment managers look for a low price to earnings ratio, low price to sales ratio, and generally a higher dividend yield. The main ratios for the value style show how this style is very concerned about the price at which investors buy in. The idea behind value investing is that stocks of good companies will bounce back in time when the true value is recognised by other investors and the market.
Quality and Lower Volatility Investing
In recent years, we have noticed an increase in other styles of investing. These styles include Quality and Lower Volatility investing and, in many cases, some products will focus on both.
Investing in Quality companies is usually associated with companies with efficient management, sound balance sheets, low debt, profitability, and strong cash flows. Quality strategies seek to provide excess returns by investing in companies that are better positioned for short- and long-term growth.
Lower Volatility investing targets companies with less volatile share prices that typically fall less than the share market during share market declines.
Higher quality and lower volatility portfolios aim to deliver strong up-market participation and down-market protection. These portfolios also tend to blend well with growth and value portfolios to improve overall portfolio diversification.