The value or growth framework is "overly simplistic", says Rajiv Jain, chairman and CIO of GQG Partners. While avoiding "value traps" is critical to long-term returns, some in the growth camp "have gotten a bit ahead of themselves".
History has taught us many lessons but uncovering those lessons is easier said than done. Under trying circumstances such as our current environment, it’s often difficult to carry a prudent optimism. But what if history shows us that human progress can push forward despite our less than ideal current conditions? Let us explain.
During the Great Plague in 1665, many people made a rush out of the cities to retreat to the countryside (not unlike 2020 where not a day goes by that a story isn’t published about a rush out of cities and an embracing of suburban or rural life). One such person retreating to the outskirts during this period of turmoil was none other than Sir Isaac Newton. During this period of quarantine and exodus, Newton made great strides in not only what would ultimately become known as calculus, but also this very small thing involving an apple and ultimately what keeps us glued to the ground – gravity. In hindsight, and driven by Newton’s insights, this particular quarantine earned the moniker annus mirabilis – the year of wonders.
In our current environment, and while not as extraordinary as calculus, but still quite extraordinary, is something that we’re all readily accustomed to at this point – virtual everything.
Just six months ago, this interconnected global system of virtual meetings, events, etc. was almost entirely inconceivable, at scale. The teleconference, while not new and arguably if not for our current circumstances, would have remained relegated to quick meetings squeezed in between the really important ones or simply saying “hello” to family members abroad.
So like Newton, a reframing of the environment, even if under less than ideal circumstances, can bear great fruit (pun intended). The goal, of course, is to recognize those opportunities before others do, a proposition much easier said than done. Therefore, to do this, the industry often uses an overly simplistic framework, one of value or growth.
Value: purchasing securities that are “cheap” based on some metric such as low price to book or low price to earnings. The value factor has been recently maligned but historically revered due to its somewhat intuitive formulation combined with academic citation rings on its efficacy.
Contrast this with the historical underdog, “growth” which is rooted in optimism about the future and based on metrics such as above average revenue and earnings per share growth. While not nearly as academically sound as its value foil, growth has been favored by investors for more than a decade due to a perceived “growth scarcity” as well as the prevalence of companies with strong network effects, which has seen growth strategies and indexes accrue relative gains over value.
Because of this decade long phenomenon, much like the urban exodus articles noted above, not a day goes by that some publication doesn’t run with a story from one camp, explaining their plight with religious zeal, in defense of one “factor” versus the other. While we think there’s nothing wrong with being religious in your personal life, we believe a more agnostic approach to investing is worth pursuing.
GQG Partners’ is not one of value nor growth, we’re simply focused on compounding and teasing out a process that works. Having said that, we do believe a company needs to be growing in order to be worth the work as we believe avoiding value traps is critical to long term returns. But we also think that areas of the market, particularly in the high growth camp, those that have directly benefited from the current virtual revolution or those that are perceived as “revolutionizing the planet” in some other way have gotten a bit ahead of themselves.
We think this is especially true for those “revolutionary” companies that have not produced cash flows commensurate with their recent price appreciation or have come to market under the newfound gusto for blank check companies. Why such caution? Because as students of history, we’ve seen this before.
Much like the speculative fervor that was produced in the decades following Newton’s annus mirabilis, we think investors in certain areas would benefit from recalling the words of Thomas Babington Macaulay, describing the high growth investors of his time as having “an impatience to be rich, a contempt for those slow but sure gains which are the proper reward of industry, patience and thrift".
While it’s not always easy to resist the push and pull of either camp, agnostic we shall remain, solely focused on identifying opportunities wherever they exist, most likely due to the distractions caused by the battles between our more zealous style-box focused peers.
Rajiv Jain is chairman and CIO of GQG Partners
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