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Overgrown – should investors cut back on growth?

It’s hard to find fault with easy-to-understand companies able to defend themselves from competition but investors must be careful not to over pay.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Growth investing is a style that’s been hugely popular in recent years. But what exactly is growth investing?

Growth investors buy shares in companies they think can generate above average growth in earnings – companies that grow faster than the rest. Where earnings go, the share price has normally followed in the long run.

Facebook, Apple, Amazon, Netflix and Alphabet (Google's parent company) are some of the world's best-known growth companies, known collectively as the FAANGs, and they’ve performed exceptionally well. Over the past five years, they've made an average return of 270%, although past performance isn't a guide to the future.

Here in the UK, growth companies like Diageo and Unilever, which own hundreds of consumer brands between them, have been popular. Their dividends have increased steadily over the years, which is attractive in a world of low interest rates. Unlike interest paid on cash though, dividends are variable and aren’t guaranteed.

Investors are prepared to pay up

Growth companies don’t always come cheap. But people who invest in them say it's ok to pay more for a high quality business, as long as you have confidence it can continue to grow earnings.

It's one thing to grow earnings over the next few years. But growing them over the next few decades is something different altogether.

It all comes down to a competitive advantage. It could come from intellectual property, like patents, to keep the copycats at bay. Or it could be from having a better reach, allowing companies to put their products in front of more customers than rivals.

Companies that can grow earnings over the long term, by defending themselves from competition, have the potential to thrive.

Expect bumps in the road

The problem with paying up for a company is that its share price can have further to fall if it doesn’t meet investors' high expectations.

Take Facebook for example. Its share price has risen strongly since it listed on the stock market in 2012. But in July 2018, the company's shares fell 19% in one day when it reported weaker-than-expected revenue and disappointing growth in global daily active users.

A great growth option

We think the Rathbone Global Opportunities Fund is a great way to invest in growth opportunities across the globe.

Manager James Thomson invests in easy-to-understand companies with the potential to dominate their industry and defend themselves from competition. He’s selective, so doesn’t invest in all the FAANGs and is willing to search off the beaten track to find companies with superb potential that might be overlooked by other investors.

He has the flexibility to invest in higher-risk emerging markets, but tends to stick to his strengths in developed markets – the fund’s biggest area of investment is the US.

It’s not as concentrated as some other global funds, holding 50-60 companies. Thomson can also invest in smaller companies. Both of these factors can serve the fund well in the good times, but increase risk.

The fund’s long-term track record is excellent. It’s grown 666% since the manager took control in November 2003, compared with 374% for the broader global stock market. We think Thomson is a talented stock picker with an impressive track record. Remember past performance shouldn’t be seen as a guide to the future though, and unlike cash all investments can fall as well as rise in value, so you could get back less than you put in.

James Thomson - Career track record

Past performance is not a guide to future returns. Source: HL to 31/07/19

Annual percentage growth
Jul 14 -
Jul 15
Jul 15 -
Jul 16
Jul 16 -
Jul 17
Jul 17 -
Jul 18
Jul 18 -
Jul 19
Rathbone Global Opportunities 24.2% 15.3% 19.2% 18.8% 14.2%
FTSE World 12.3% 18.0% 18.2% 12.4% 11.0%

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2019

More about this fund including charges

Key investor information

Fund manager view – James Thomson

Growth stocks have been outperforming for several years and the temptation is to believe that the run must be over soon. But we believe that sluggish and unreliable economic growth is a key reason why investors will continue to support these growth stocks for years to come.

Trump’s election gave us an important clue. Initially when Trump was elected, investors believed he would be the most pro-growth, pro-business, anti-regulation President in a generation. This is a wonderful backdrop for value stocks which today are mostly banks, commodities, industrials, and other cyclicals.

Today value stocks are the most economically sensitive stocks in the market so a President that promises a return to economic greatness will benefit them. And as you can see from the chart below the grey line (value stocks) initially spiked following Trump’s election but quickly pulled back as investors realised that Trump would not usher us into an era of permanently higher trend growth.

In fact most of his policies are aimed at short term victories and are unlikely to restore sustainably higher economic growth. If you believe that we live in a world of unreliable economic growth, then you should embrace growth stocks because investors buy growth when economic growth is hard to find.

These views are the author's own and may not be shared by Hargreaves Lansdown

Examples of growth stocks in the Rathbone Global Opportunities Fund:

  • Match Group (online dating – owner of Tinder)
  • Visa & Mastercard (payment network)
  • S&P Global (bond ratings and index provider)
  • Sartorius (healthcare equipment)

Value versus growth - 10 year relative performance

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2019

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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