Investors should look beyond the labels of “growth” and “value” by taking a disciplined yet flexible approach to find discounts in different types of companies and market conditions.
“What I have learned over three decades is that we are after finding things that are mispriced to their inherent worth in pursuit of value. However, the inherent worth of any asset we acquire is dependent on its growth in reality,” said Kent Shepherd, senior vice president, senior client portfolio manager at Franklin Templeton Investment Solutions.
Such a mindset applies to all kinds of companies – from traditional businesses such as a steel manufacturer, to a disruptor such as a tech company, to a pharmaceutical biotechnology company.
As a result, investors need to apply a multi-asset lens to assessing value versus growth, added Shepherd.
Five ways to find value
Templeton Global Equity Group has broken down value investing into five areas. The first area is companies of classic value, meaning the stocks and sectors with very low price-to-earnings ratios – what many people would recognise as “real value investing”, explained Peter Sartori, executive vice president and portfolio manager.
The second consists of companies with mispriced growth, where he said the market is under-estimating growth prospects over the next five-to-10 years.
The third area is companies of quality – those he described as being “great companies with great management balance sheets operating in very strong industries”.
The fourth consists of companies with strong cashflow, while the fifth is companies with discount assets. “[These are] companies with assets that are not recognised by the market yet, meaning they have significant potential for growth,” added Sartori.
Ultimately, performance of these five areas of value varies and is subject to market conditions.
For example, Sartori explained, classic value performs best during a cyclical recovery that flows through to an increase in rates.
Mispriced growth, on the contrary, is almost the opposite to classic value. “It was a great place to be until the end of 2019 but not so much recently,” he said. “It was the same case for the quality sector, where it achieved fantastic performance until the end of 2019.”
Gearing up for growth
Growth investing, meanwhile, is based on identifying specific qualities in a company.
Clearbridge Investments (part of Franklin Templeton), for example, looks to find leadership companies with what Peter Bourbeau, managing director and portfolio manager, called a “competitive moat”.
This enables companies to generate significant cashflow and, therefore, creates options for them to either expand or invest into the business. “What they are trying to achieve is a virtuous cycle of compounding the cashflow all the time, keeping the innovation pipeline going and attracting high levels of talent,” said Bourbeau.
This is typical of companies with a global footprint and high levels of innovation regardless of size. “A high level of innovation is not restricted to any industry in particular and it can be achieved by a brewer, a cloud computing company, or an e-commerce company,” he explained.
Investors can also identify opportunities in high-growth firms that have negative cashflow – assuming they look at these types of companies through a different lens.
“If their business models are correct, they will become cashflow positive over three-to-five years,” said Bourbeau.
