What is growth investing and value investing? What are the key indicators that tell whether a particular fund is either into growth or value investing?
Chanakya, via e-mail
Both growth and value are two fundamental approaches to stock investing that fund managers follow. Growth investing entails looking for companies that have a potential to grow faster than others. The optimism is reflected in the premium valuation commanded by the market price of such companies. A value investor, on the other hand, buys undervalued stocks that have a potential for appreciation, but are usually ignored by the investing community.
Typically, growth stocks have low dividend yields and above-average valuations as measured by price-to-earnings (P/E), market capitalisation-to-sales and price-to-book value ratios (P/B), reflecting the market's high expectations of superior growth. In contrast, value stocks usually have above-average dividend yields and low P/Es.
The Value Research Style Box tells you whether a fund is into growth investing or value investing (see box below). A fund, which is a growth investor, will lie in the left column of the matrix and a value fund will appear in the right column. The Style Box also tells you other things about a fund, such as whether it has a large-cap, mid-cap or small-cap bias. Growth stocks do well during periods of rapid economic expansion, while value stocks typically perform well during market downturns or in the initial stages of market recovery.
Growth and value investing are, however, not static concepts. When the value in a value stock is realised, it doesn't remain a value stock. Similarly, when growth stock stops growing or its share price falls substantially, it may have a lot of 'value' in it.
Almost all existing equity funds follow growth investing approach. Only Templeton India Growth, Sun F&C Value Fund, IL&FS Growth and Value Fund and UTI Master Unit Value Fund have some explicit involvement with value investing. But even in such cases most funds are reluctant to label themselves as value funds. Sun F&C and IL&FS say that they look for growth stocks at attractive valuations. This is something like growth investing, but not at any price. So, these funds look for relatively 'cheaper' stocks within the universe of growth stocks.
For Franklin Templeton, funds designated with the Templeton nomenclature follow value style of investing. Templeton India Growth Fund in its early days was a strong believer in value investing. In 1998 and 1999, the fund had virtually no exposure to pharmaceuticals and fast-moving consumer goods (FMCG) sectors, which were doing well. Rather than invest in these 'growth sectors', Templeton India Growth was deeply embedded in 'value-oriented' cyclicals. It hardly had any exposure to technology stocks too. This value orientation proved costly, and the fund was at the bottom of the league in 1998 and 1999. In 2000, Templeton India Growth finally took substantial exposure to growth stocks. After this episode, this fund also seems to have become a keen follower of growth-at-an-attractive-value school of thought.
Of course, neither style of investing comes with any guarantees. But by picking up funds that utilise both styles, you can reduce your chances of a significant loss from any fund during bad times. New investors would be better off in a large-cap blend fund that includes both value and growth stocks.