Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest
THERE has been a stark mismatch in returns from shares at opposite ends of the style spectrum so far this year. Technology stocks have come off the boil in dramatic fashion, just as energy producers and mining stocks have gotten into their stride.
These events have raised the possibility of more permanent “regime change” across stock markets.
But will this last and should investors alter their approach to buying shares and funds?
Growth and value stocks
Growth stocks are generally understood to be those that can grow their earnings faster than the market average independently of economic conditions, year in, year out.
Value stocks are essentially those that score well in terms of dividend yield or assets versus market value (a low “price to book” ratio). Credentials like these can indicate a company has been overlooked in the past or is just plain out of favour with investors today.
Growth stocks and jam tomorrow
If a company is growing its earnings consistently every year, its annual earnings in, say, ten years time stand to be immense compared with today. That means a very large part of the company’s total profits over the next ten years is going to be made in the latter stages of that period.
However, all those earnings a long way out are worth less to an investor in today’s money if inflation and interest rates are high in the meantime. Jam tomorrow doesn’t cut it quite so well.
Value investing as a long term strategy
Value investing has a reputation for delivering excellent returns over the very long term. However, that could be partly down to a lack of true technology innovators in the past. The long term returns from what we now term value stocks may simply be close to the long term average.
Or it could be down to dividends. Over the long term, dividends have accounted for a substantial proportion of total returns. It stands to reason that owning value stocks tends to accentuate the positive effects of earning then reinvesting dividends.
Growth stocks will rise again
Growth stocks will return to favour at some point, it’s just not likely to be until investors have a clearer understanding of just how far inflation and, by implication interest rates, will rise over the next few months and into 2023.
It’s inconceivable that technological change will become less important in the years that lie ahead. The electric vehicle revolution, the desire to automate, shortages of water, energy and decent housing around the globe, and strategies to tackle climate change all call for more technological innovation.
Maintaining a balance is never a bad idea
Owning a diversified portfolio of investments lessens the risk of being invested in the wrong part of the market when an entirely different area is making headway.
This is part and parcel of the Fidelity Select 50 Balanced Fund, which maintains an exposure to both investing styles across a wide range of markets. Current large holdings include the Fidelity Special Situations Fund (strong value bias) and JPM US Select Fund (strong growth orientation).
Price to book: The price-to-book is a financial ratio used to compare a company's current market price to its book value – the value of company’s assets.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Select 50 Balanced Fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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