Equity markets are not driven by a single type of company or investment style. Instead, performance tends to rotate over time between different styles of investing, most commonly referred to as growth and value.
Understanding how these styles behave is an important part of building well-diversified, long-term investment portfolios.
What is Growth Investing?
Growth investing focuses on companies expected to grow their revenues and earnings at an above-average rate compared to the broader market.
These companies often:
- Reinvest profits to support expansion
- Trade on higher valuation multiples
- Derive value from future earnings potential rather than current income
Because expectations are already high, growth stocks can be more sensitive to changes in interest rates and market sentiment.
What is Value Investing?
Value investing focuses on companies that appear to be trading below their intrinsic or long-term economic value.
These companies often:
- Have more established business models
- Generate stable cashflows or dividends
- Trade at lower valuation multiples relative to earnings or assets
Value stocks may appear less exciting, but they can provide resilience during periods where markets prioritise stability and earnings certainty.
Why Do Growth and Value Perform Differently?
The performance of growth and value styles is influenced by broader economic conditions and market cycles.
For example:
- Lower interest rate environments have historically been more supportive of growth companies
- Higher inflation or rising rate environments can be more supportive of value-oriented sectors
- Investor sentiment and liquidity conditions can also drive rotation between styles
Importantly, these cycles are not predictable with consistency.
Why Style Diversification Matters
Because growth and value styles do not behave in the same way across market cycles, concentrating entirely in one style can increase portfolio risk.
By combining both approaches, investors can:
- Reduce reliance on a single market environment
- Improve diversification across economic cycles
- Avoid the risk of being heavily exposed to a style that is temporarily out of favour
The objective is not to predict which style will outperform, but to ensure the portfolio is not dependent on any single investment regime.
Common Investor Behavioural Mistake
One of the most common investment mistakes is extrapolating recent performance too far into the future.
For example:
- After periods of strong growth performance, investors may assume growth will continue to dominate
- After value cycles, investors may shift too heavily into cyclical or defensive positioning
This behaviour often leads to buying high and selling low across investment styles.
A disciplined, diversified approach helps reduce the impact of these behavioural biases.
How We Apply This in Portfolio Construction
In constructing portfolios, we aim to ensure equity exposure is diversified across both growth and value styles.
This is typically achieved through:
- Multi-manager funds
- Broad global equity allocations
- Diversified index exposures
- Blended active and passive strategies
The goal is not to time style rotations, but to ensure portfolios remain resilient across different market environments.
Final Thoughts
Growth and value investing should not be viewed as competing strategies, but as complementary sources of return within a diversified portfolio.
A well-constructed investment strategy does not depend on correctly predicting which style will outperform next. Instead, it focuses on ensuring that portfolios are structured to remain robust across a wide range of market conditions.
