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How investment styles can impact the performance of your investments

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Investment styles are an important part of investing. They are key to defining the philosophy and strategy of a fund. Importantly, they also have a huge role to play when it comes to how a fund performs during different points in the economic cycle and under a range of different scenarios.

There are two main investment styles, and these are value and growth. Most of the time they are pitted against each other as analysts debate which one is top of the class. But as a long-term investor it’s often not a case of one or the other.

On top of growth and value, there’s also the notion of quality-based investing which can be used by both growth and value investors during times of market uncertainty to try and balance things out.

In March’s Skipton Insight we take a look at how growth, value and quality-based investment styles work, and how they could impact the short-term performance of your investments depending on what stage of the economic cycle we’re in, or even because of what’s going on in the world. We’ll also look at how this forms the basis for our analysis of your investments, and what all this means for you as a long-term investor.

Where to start?

First off, let’s take a closer look at each of the three investment styles.

Growth investors like to invest in companies that are attractive because of the opportunities they provide for long-term growth. Google is a good example of a company that could be seen by many to offer a lot of potential for growth. Over the years it’s grown its revenue, has substantial cash flow and profits – factors which are expected to continue into the future, making it an attractive prospect to growth investors.

Value investors look for stocks they believe to be undervalued in the marketplace. Stocks can become undervalued for many reasons. In some cases, public perception will push the price down. Take financial sector companies, for example. After the 2008 global financial crisis a lot of consumer confidence dwindled for financial stocks and the price followed.

Since the crash there’s been a lot of regulation brought in, and behind the scenes a lot of these companies are well run businesses with stable balance sheets – but the price isn’t reflected in this, which leaves them as good businesses trading at a low price.

Now for quality investing – this involves investing in high quality companies that will stand the test of time. Ones with low debt, good cash flow and strong balance sheets. These types of businesses rarely make the headlines, instead they deliver consistent results in an unassuming manner. Some market professionals could consider Rightmove as a 'quality' type of stock - the online property listing platform aims to generate high margins using little capital.

Quality can exist in both growth and value worlds, offering protection during times of market uncertainty – but this comes with the caveat of it being a more expensive investment strategy to take.

Where does the economic cycle come into it?

Over shorter periods of time, the performance of either growth or value typically depends on which point of the economic cycle we happen to be in. Value tends to perform better during periods of higher inflation and rising interest rates, and growth stocks do well when interest rates are low or even falling and company earnings are rising. As for a quality-based strategy, this works in conjunction with growth and value at different times in the economic cycle; it can prove particularly useful when times get tough.

There are four main cycle stages:

Phase What happens Which tends to do better?
Early-cycle phase The economy is on the rebound from recession and growth is high. Interest rates are low and people are spending money. Value
Mid-cycle phase Normally the longest cycle, averaging about five years. During this period the economy is stronger, with steady levels of growth and low interest rates. It’s usually a good time for growth stocks. Growth
Late-cycle phase A slowdown from the higher period of growth experienced in the mid-cycle. It doesn’t mean we’re seeing negative growth, it’s simply that the pace of growth has slowed. Growth / Quality
Recession Economic activity is falling, profits decline. Rates and business inventories gradually fall, setting the stage for recovery. This phase is usually very short. Value / Quality

It’s not as cut and dry as these four stages

Sometimes the economy experiences asset bubble bursts. These are when the price of an asset rises at a rapid pace without any real justification for the price spike. Eventually the bubble around this asset bursts and the price crashes – often with the rest of the stock market too. There can even be some form of economic downturn.

A good example of an asset bubble burst is the dot-com bubble in 2000 – caused by a rapid rise the price of shares in US technology and internet-based companies.

When the internet bubble burst it caused a huge market decline, but it didn’t impact the market equally. While growth stocks plunged, many stocks experienced gains. The tech-focused Nasdaq Composite index fell by 39.0% in 2000, while the Wilshire 5000 Large Cap Value index gained 17%.

Then there’s the 2008 global financial crisis, which caused an 18-month recession, and which caused markets across the board to plummet. But despite the short and sharp falls, value, growth, and quality went on to recover well over the long-term. In the five years after the crisis the MSCI World Value index had gained 76.5%, the MSCI World Growth by 87.4%, and the MSCI World Quality index by 90.7%.

What about external events?

Sometimes markets have periods of high volatility caused by external events that aren’t linked to the economic cycle – the pandemic being a good example. During these periods it can be unclear what direction markets are actually heading in. There are typically no winner or losers, and the pendulum tends to swing between different styles – this has been the case since the middle of 2021, and for the time being seems to be carrying on into 2022.

Markets have had a lot to deal with since the turn of the new year. Inflationary pressures, rate rises and the awful events we're seeing unfold in Ukraine have all impacted the short-term performance of markets – the MSCI World Value index slipped by 1.3% in January and MSCI World Growth by 9.3%.

What we’re trying to say here is there are times when certain investment styles will struggle, and times when one will do better than another – depending on the health of the economy and what external factors are at play. But that’s why it’s important to take a diversified approach that combines different styles. And while fast falls can seem concerning, as a long-term investor you shouldn’t be getting too hung up on short-term performance – whether it’s a big drop or a big gain.

It's all about the long-term

Kieran Ellis

As technical researchers our main concern is, and always will be, the long-term performance of any funds you’re invested in. A few days, weeks or even one to two years doesn’t really offer a practical time frame to judge a fund’s long-term ability – that’s why we always stress the importance of investing your money for five to ten years.

Kieran Ellis, Technical Research Specialist

“We rarely have concerns about short-term performance. The only time we do is when a fund isn’t performing in line with our expectations. The investment style of a fund plays a major role in these expectations – it provides us with a clear vision of how and when we expect a fund to do both well and poorly.”

By investing your money through Skipton, the ultimate goal is that you hold a diversified portfolio designed to generate long-term growth. With this in mind, we aim to provide a balanced exposure to growth, value, and quality styles through funds that we believe do it best – something that could navigate the different conditions that can happen over an economic cycle.

Our due diligence

Kieran continues, “When it comes to monitoring the ongoing performance of your investments, we have an internal committee, which also includes third party specialists. We constantly keep an eye on market conditions and whether the funds you’re invested in are performing in line with our expectations.

“We also look at the philosophy and processes of funds and define if these are evidenced and repeatable. We don’t select funds purely based on their past performance, we invest because we believe the fund is robust, reliable and consistent enough to do what it’s done in the past in the future.”

As we’ve expressed to you many times before, when the going gets tough it’s important to remain committed to your long-term goals and keep in mind the diversified approach you take through your investments. We also want you to feel reassured that as part of the service you receive, we’re carrying out a high level of due diligence on the funds you’re invested in – if we’re not concerned, there’s no need for you to be either.

Economic and market conditions experienced in the past may not be repeated in the future. The opinions and analysis provided are for information only and do not constitute financial advice.

Get in touch

As always, if you have any questions about your investments please get in touch with us on

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