Growth or value? Why choose when you can have core?

The last few years have proved challenging for investors. A global pandemic, a war in Europe, and interest rates rising sharply in response to inflation ballooning to 40‑year highs. Now we have a new president entering the White House, a slowing global economy alongside normalizing inflation, and higher equity valuations. As we look out into 2025 the investment landscape remains complex.

"…taking a core approach, we believe, can take some of those difficult decisions away and eliminate the need to have conviction in either growth or value."

Which investment style to choose—growth or value—is also a difficult choice. Is it better to have a growth bias in the era of artificial intelligence (AI) and health care innovation? Or a focus on value‑oriented areas of the market, such as cyclicals or interest rate-sensitive names that may benefit from inflation and higher interest rates? Ultimately, there is always something to worry investors, both at a macro and micro level. However, taking a core approach, we believe, can take some of those difficult decisions away and eliminate the need to have conviction in either growth or value. Importantly, operating a core approach that is style‑balanced between both disciplines can allow stock selection to be the main driver of returns. This offers the potential for a “no excuses” type of portfolio that is not excessively impacted by macro events or dependent on specific style factors to deliver returns.

Allow stock selection to be the main driver of performance

Being able to focus on the most actionable ideas is the best way, in our opinion, to deliver alpha in both up and down markets, as well as in markets led by growth or value. To have a portfolio that is not excessively dictated by macro factors or style bets requires incorporating stocks with different risk profiles, different fundamental drivers, and different factor exposures. At the same time, it is important to look for proven, growing businesses that you believe can improve profitability and cash generation going forward but always at an attractive valuation point. This needs a framework that emphasizes business quality (a function of growth potential, profitability, and durability) and valuation discipline to own names with favorably skewed returns relative to downside risk.

"To have a portfolio that is not excessively dictated by macro factors or style bets requires incorporating stocks with different risk profiles, different fundamental drivers, and different factor exposures."

The macro variables that can drive stocks also need to be balanced to make sure a portfolio is not overexposed to similar macro drivers (like a specific end market or geography). Focusing on companies that are positioned to win relative to their peer group is key, especially since stock returns within the same sector or industry can exhibit notable dispersion. That requires identifying durable and resilient companies that can win over time through any number of competitive advantages over peers, whether that be strong pricing power because their products are better, good management with efficient operations that deploy capital more effectively, or a strong research and development (R&D) pipeline that helps to launch new products that accelerate growth. Research is crucial to understand who has, or is developing, an advantage.

It’s also important to be aware when stocks are undergoing periods of distressed sentiment but transitioning to a better outlook. While it is always tempting to wait for patterns of recovery to be established, early identification of fundamentals stabilizing, inflecting positively, can be crucial to return generation.

Constructing a portfolio that is positioned across a range of macro outcomes

Identifying attractive names through fundamental analysis, which includes both a qualitative and valuation assessment of a business, is crucial to understanding how a stock will respond to broader macro shifts. The importance of constructing a portfolio that is positioned across a range of potential macro outcomes cannot be overestimated.

Imagine a hypothetical scenario where attractive ideas have been identified in the steel industry (typically a cyclical part of the market), an independent power producer (utilities are generally steady growers and more resilient), and an enterprise software company (potentially described as a disruptor because it is growing much faster and taking market share). It may appear that a level of diversified exposure has been achieved across different industries, but the overall portfolio would still be at risk in the event of a “growth scare,” as many of these types of companies require accelerating economic growth to prosper.

Another example would be in housing. Housing is a large industry in the U.S., which benefits directly from interest rates falling. Within housing, however, you have a number of areas, such as retailers, building product suppliers, and financials (mortgage services). Owning companies in each of these “different industries” on the surface may appear to reflect diversification. But, again, this fails to achieve proper diversification as these stocks remain largely driven by how overall U.S. market performs, and the direction of interest rates is a large part of that.

"You are unlikely to achieve proper diversification just by simply owning companies in different industries."

Both of these examples demonstrate how important it is to understand the drivers of performance. You are unlikely to achieve proper diversification just by simply owning companies in different industries. It’s, therefore, crucial to analyze the sensitivity of each holding to higher/slower growth rate environments, as well as higher/lower inflation/interest rate environments (see Figure 1) as these are the main macroeconomic shifts that are most likely to impact stock performance. Understanding these sensitivities can help to neutralize both macro and micro events and potentially create that “no excuses portfolio” that we are seeking—an important goal for investors when investing in this complex market environment.

Global Select Equity approach—Diversifying exposure to achieve style-balance

The Global Select Equity Strategy defines core balance through three distinct buckets—cyclicals and turnarounds, steady growth, and disruptors—with the market dictating where opportunities present themselves.

• Cyclicals and turnarounds are companies where, through our research, we have identified positive cyclical or structural change factors that can act as a “catalyst” for a stock to rerate.
• The steady growth bucket contains companies that have established robust business models, demonstrate a clear strategy, and have proven good execution and earnings growth throughout a business cycle.
• Disruptors are businesses that are gaining share, which have a large addressable market, and where opportunities for extreme outcomes exist. Crucially, they are still required to have quality business models that can generate strong free cash flow.

 

 

Risks—The following risks are materially relevant to the portfolio

Currency—Currency exchange rate movements could reduce investment gains or increase investment losses.

Emerging markets—Emerging markets are less established than developed markets and therefore involve higher risks.

Issuer concentration—Issuer concentration risk may result in performance being more strongly affected by any business, industry, economic, financial, or market conditions affecting those issuers in which the portfolio’s assets are concentrated.

Sector concentration—Sector concentration risk may result in performance being more strongly affected by any business, industry, economic, financial, or market conditions affecting a particular sector in which the portfolio’s assets are concentrated.

Small- and mid‑cap—Small and mid‑size company stock prices can be more volatile than stock prices of larger companies.

General portfolio risks:

Equity—Equities can lose value rapidly for a variety of reasons and can remain at low prices indefinitely.

ESG and sustainability—Environmental, social, and governance (ESG) and sustainability risk may result in a material negative impact on the value of an investment and performance of the portfolio.

Geographic concentration—Geographic concentration risk may result in performance being more strongly affected by any social, political, economic, environmental, or market conditions affecting those countries or regions in which the portfolio’s assets are concentrated.

Hedging—Hedging measures involve costs and may work imperfectly, may not be feasible at times, or may fail completely.

Investment portfolio—Investing in portfolios involves certain risks an investor would not face if investing in markets directly.

Management—Management risk may result in potential conflicts of interest relating to the obligations of the investment manager.

Market—Market risk may subject the portfolio to experience losses caused by unexpected changes in a wide variety of factors.

Operational—Operational risk may cause losses as a result of incidents caused by people, systems, and/or processes.