Investing for growth
Growing the value of investments over a period of time is a common investment objective. Without solid growth the future income producing potential of your assets will be limited.
In this article we look at what growth investing is all about and what investments to consider when you are aiming to grow the value of your assets.
Previously we examined investing for income and the importance of moving beyond term deposits. For most investors, investing for income is not the primary focus until they leave the workforce. During the intervening years, growing assets is the main objective, for without growth, future income will always be limited. In this article we examine how to invest for growth, the pros and cons and the types of securities that offer growth potential.
Just what is growth investing?
In general, investing for growth means putting money into stocks. That can take the form of directly buying shares, instalments and managed investments. It might also include an ETF (exchange traded fund) listed overseas but accessible to local investors via their Australian broker. An example might be an ETF that invests in biotech stocks or another that invests in a particular geographic region that could be poised for rapid growth – China, India, Eastern Europe etc. It also means allocating part of a portfolio to fixed-income investments, such as bonds and interest rates securities, which may provide a stronger return than stocks in some periods.
Investing for growth requires you to understand there is risk of losing your money. These assets are not usually capital protected although risk can be mitigated through diversification and hedging. The stocks themselves range from large capitalisation to the smallest companies, from unproven companies without profit but full of promise to companies who pay dividends and grow at a slower rate. It might be the case that either the technology or the market or both is uncertain – who could forget the tech boom and bust?
What do growth-style managers look for?
A growth-style manager is one that favours investments that will show strong capital growth over producing an income. Generally, growth-style managers look for companies with above-average earnings growth and profits, which they believe will be even more valuable tomorrow. Because these companies tend to grow earnings at a fast pace, they typically will have higher prices relative to earnings (P/E ratio).
Growth managers also look for companies that are well positioned to capitalise on long-term
growth trends that may drive earnings even higher.
Finding growth stocks
Check with your broker at their website. Most nowadays have Model Portfolios covering Large Capitalisation, Small Capitalisation, Growth, Income and Value styles. These can be an excellent starting point however depending on your situation will not necessarily be a “perfect fit”.
One such model growth portfolio states its strategy is to select stocks whose businesses are likely to demonstrate strong growth characteristics based on bottom up analysis of the key variables that impact the price of growth companies, namely earnings growth, Price-Earnings-Growth (PEG), sales growth, industry growth, market dynamics, quality of products and services, and quality and historical performance of management. It then cautions that growth portfolios are suitable for investors with a high-risk profile seeking strong capital growth over the longer term and a low level of income. Investors should expect volatility in returns over time whilst dividends should be partially franked. So growth investing should be a long-term proposition - 5 years as a minimum to truly allow growth to take place and ride out market dips in valuations.
Other vehicles for direct share investing
Listed managed investments are an alternative for investors that want exposure to a portfolio of growth assets but don’t have the time or perhaps the interest in buying and monitoring a portfolio of individual shares. LMIs are like managed funds, except they are listed on ASX so you can buy and sell LMIs just like shares and that includes in a Self Managed Super Fund.
Research on different LICs can be found on the ASX website at with a number of funds such as Aberdeen Leaders, Wilson Leaders and Ironbark Capital targeting growth assets.
Instalments are yet another way of accessing growth assets by making a part payment upfront and delaying an optional final payment (or second instalment) until a later date (expiry date). This allows you to buy shares, for a fraction of the current share price whilst receiving the benefits of capital growth, dividends and franking credits.
Generally instalments are used to leverage or diversify an investment portfolio, however they can also be ideal for trading short-term price movements. Unlike other forms of gearing, you are not obligated to repay the final payment, making them eligible for Self Managed Super Funds.
Where to from here?
There is something appealing about growth. As the name implies it is a strategy designed to take advantage of new sectors and the stocks that will shape their industries. Quite aside from the financial spin offs there is a certain satisfaction in being an investor in a biotech stock that helps improve the quality of people’s lives. Looking for companies that are poised to grow their market share, their profits, and their value takes time and patience and a measure of good luck. When all three combine the shareholders benefit.
Growth investing is one style, another and equally popular is value investing. Both styles have merit and because historically style rotation out of value and into growth, and vice versa have occurred with a level of unpredictability one should not be discounted in favour of the other. In other articles we look at value investing because an approach that covers both styles and an active management is the most successful one to take when investing in equity markets.
For more information on the role of different ASX products in building a portfolio of growth assets see the website for
- online classes or
- finding an adviser to help with the selection process
© All rights reserved 2004. This material is educational and it is not intended to constitute financial advice.
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