What is growth investing?
Growth investing focuses on identifying companies poised for rapid revenue and earnings expansion, often driven by innovation, market disruption or evolving consumer preferences. Targeting companies that are poised for growth seems an intuitively straightforward path to investment success, but taking the right 'growth' approach is important.
We think selectivity is key.
The origins of growth investing
Growth investing is a well-known strategy in active management, but it is also a strategy associated with high volatility. That is why it is important to understand the ‘growth’ factor, because in one year, it could propel your portfolio, only to drag it down the following year.
Successful growth investors can outperform through the cycle. But this is easier said, than done.
According to a recent MSCI paper, "The roots of growth investing can be traced back to early 20th century investors who focused on companies with strong earnings potential and reinvestment prospects."1
Growth and value
Growth investing has historically been incorrectly considered the opposite of value investing.
That started to change in 1992 when Warren Buffett wrote in his letter to shareholders when discussing his observation that most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth."
Buffett said, "In our opinion, the two approaches are joined at the hip: growth is always a component in the calculation of value…"2
This was five years after ‘Black Monday’. In the years immediately after the stock market crash, value managers did well, but growth managers had been staging a comeback. Growth had gained notoriety among active managers, perhaps most famously by Peter Lynch, throughout the late 1970s and 1980s.
Growth has been a hot topic among international equity investors since the GFC, as ‘growth’ companies outperformed ‘value’ companies after many decades of underperformance. Growth and its performance are now closely intertwined with trends such as AI and the digital economy.
Key differences between growth and value investing
Growth and value investing differ in their approach to the selection and assessment of stocks. Growth investors are typically less concerned with the current price of the stock relative to its fundamentals and more with the potential for significant growth in revenues and earnings. In contrast, value investors focus on obtaining stocks at a price that implies a discount to their true worth.
Historical performance and cyclicality
Historically, the success of growth and value investing has been cyclical. There have been periods when growth stocks have significantly outperformed value stocks and vice versa. This cyclical nature suggests that economic, geopolitical, and sector-specific factors can impact the performance of each strategy differently.
Successful growth investors emphasise:
- Strong historical and future earnings growth
- Competitive advantage through innovation or market leadership
- Sustainable long-term growth trends rather than short-term valuations.
Some of the key measurable characteristics identified in academic and commercial research include:
- Long-term forward earnings-per-share (EPS) growth rate
- Short-term forward EPS growth rate
- Current internal growth rate
- Long-term historical EPS growth trend
- Long-term historical sales-per-share growth trend
The table below provides a general overview of how value and growth stocks differ across several key dimensions:
Growth investing versus value investing
| Characteristic | Value companies | Growth companies |
|---|---|---|
| Price metrics | Typically have lower price-to-earnings ratios. | Usually have higher price-to-earnings ratios. |
| Market perception | Seen as underpriced compared to their intrinsic value. | Viewed as more richly priced based on current earnings. |
| Dividends | Often pay higher dividends. | May pay little to no dividends, reinvesting profits into growth. |
| Company characteristics | Mature companies with stable earnings. | Young or rapidly expanding companies with high growth rates. |
| Earnings growth | Slow to moderate earnings growth. | Rapid earnings growth. |
How do Investors find ‘growth’ companies
Like other investment style factors, the growth factor has been associated with various identifiable and measurable company characteristics. These have been analysed and tested by academics and financial industry practitioners. This includes assessing a combination of forward and historical earnings and sales growth, as well as identifying companies with sustainable competitive advantages.
Traditionally, ‘growth’ has been the domain of active managers.
How to invest in ‘growth’ companies
Traditionally, there has only been one way for everyday investors to gain exposure to a ‘growth’ portfolio: high-fee active funds focused on identifying ‘growth’ opportunities.
However, we think that it is possible to access the growth factor utilising a systematic, rules-based approach that targets outperformance for a fraction of the costs of the typical active management fee.
Active management provides the key: selectivity.
VanEck has a distinguished history of harnessing technological advancement and advanced analysis to identify and unlock opportunities for Australian investors. For over a decade, we have pioneered smart beta ETF strategies in Australia, with a vast number of our smart beta ETFs being the first of their kind on the ASX, offering investors the ability to construct portfolios with a targeted outcome in mind.
It is with this mindset that we contemplated the growth factor and a selective, systematic approach.
The result is the VanEck MSCI International Growth ETF (GWTH).
Beyond the factor, VanEck has ETFs focused on technology and economic transformation, which often results in a growth tilt.