Which investment strategy is right for you?

There are numerous investment styles you can adopt that will influence where and how your money is being put to work. Some focus on particular regions, while others concentrate on a particular size of company. Then there are those pursuing objectives such as growth or income.

Which one will best meet your needs? Here we look at some of the most popular investment styles and the funds that use them.

Active vs passive investing

The first discussion point is active versus passive management.

Active fund managers buy and sell assets with the aim of achieving a profit and outperforming broader stock market indices and benchmarks. They use their skill and judgment to find companies that can deliver stronger earnings and growth than the wider market. They have the flexibility to invest in stocks and sectors they believe in.

Passive investors, meanwhile, simply look to replicate the performance of a given stock market index or benchmark. They’re copying the index – and therefore will never beat it. While this means they usually have lower costs, the value of any investment will depend on what happens to the index being followed.

Should I invest in growth or value?

While one approach isn’t better than the other, they do tend to go through periods where one delivers superior returns over the other. This usually depends on how the economy is performing and whether interest rates are heading up or down.

Growth investing

Fund managers in this area will pick companies that are expected to grow over the longer term, even if the current share price seems relatively high. But, investors are willing to pay a premium with the expectation of selling them at even higher prices as companies continue to grow.

For example, the GAM Star Disruptive Growth fund, managed by Mark Hawtin, invests in companies expected to benefit from disruption caused by technological change. Microsoft, which has been a leading name in computers and software for decades, is the largest individual stock position with an allocation of just under 8% *.

Value investing

Put simply, value stocks are stocks that are ‘cheap’. The most traditional way of calculating this is in terms of ‘book value’ or the net assets on a company’s balance sheet. If the company’s net assets are greater than the value of the company implied by its share price, it is considered to be a value stock.

For example, WS Lightman European is a value fund that goes against the herd by investing in undervalued businesses with positive operational momentum. Its experienced manager, Rob Burnett, relies on a process built around years of academic research showing that value has historically outperformed over time.

Is contrarian the same as value?

Although value investing and contrarian are similar, they do have a clear distinction. Value managers seek out bargains, while contrarians are focused on going against the herd, in other words, buying what everyone else is selling and vice versa. Contrarian fund managers will use their skill and experience to uncover exciting stock and sector opportunities their rivals may have overlooked or misunderstood.

Managers with a contrarian mindset can be found in a wide variety of sectors. A good example is the Ninety One UK Special Situations fund, managed by Alessandro Dicorrado and Steve Woolley. The managers aim to deliver capital growth by investing in unloved UK companies that they believe are undervalued. Alessandro emphasised the team’s focus on contrarian investing in a recent podcast interview.

What about quality investing?

Investors who have a quality focus favour healthy companies demonstrating qualities such as impressive management teams, strong balance sheets and pricing power. The point is that managers wanting this type of firm in their portfolios will look for companies that are efficient with their capital.

Consider this scenario: you’re at the grocery store, and you notice that the organic oranges are priced the same as the non-organic ones. Given this situation, you opt to buy the “higher quality” organic oranges. This decision resembles the concept of quality investing, where investors aim to get more value for their money.

The WS Montanaro UK Income fund invests entirely in quality mid and small-cap stocks because the managers believe they offer better dividend cover, better growth, better choice and better opportunity for return on capital.

Backing small cap or large caps?

Market capitalisation, or market cap as it is usually called, is the total value of all the shares of a company. How much you invest in small and large-cap equities is one of key questions investors should be asking when they try to build a diversified portfolio.

Small cap

Investing in smaller companies can be a great way to lock in future returns by getting involved in tomorrow’s winners at an early stage in their development. The idea is that analysts spend less time focusing on businesses that are lower down the market capitalisation scale than their larger-cap cousins. As a result, there’s more scope for mispricing in this part of the market.

One interesting portfolio in this area is Cormac Weldon’s Artemis US Smaller Companies fund. Between 80% and 100% of the fund is invested in the shares of smaller companies that have market values of less than US$10bn. It also has exposure to a broad array of sectors.

Large cap

Some fund managers put their money into the world’s biggest firms as they feel reassured by their global customer base and financial firepower. These are often well-established businesses that are leaders in their respective industries. Many will also pay regular dividends to investors.

As its name suggests, the T. Rowe Price US Large Cap Growth Equity fund, which is run by Taymour Tamaddon, invests in large-cap US-based firms. Taymour favours companies that can generate above average growth for the next three to five years, determined by how much free cash flow they can produce.

One important thing to remember when considering small or large-cap companies is market cap can differ by region because companies in different parts of the world can vary in size and value. This means what defines a small cap in the US is different from what defines a small cap in the UK, for example.

Should I invest in the UK or global markets?

Many investors feel more comfortable with funds investing in household names or companies with products they are familiar with, such as oil giant BP or Coca Cola. But it’s important to recognise how this can lead to ‘home bias’ — a psychological phenomenon that refers to investors’ tendency to invest the majority of their portfolio in domestic equities.

Home market focused

Historically, many UK investors prefer to have most of their money exposed to stocks listed on the London Stock Exchange as these are often familiar companies traded in local currency.

However, it’s worth noting that many of these companies are global, with operations based around the world. This means that even though a company is listed on the UK stock market, its income and fortunes could be linked with other parts of the world.

There are numerous funds and trusts available in the UK All Companies sector worth considering. These include Fidelity Special Values, an investment trust aiming to achieve capital growth. We believe this trust should appeal to investors looking for a value play in the UK market, with a medium to long-term time horizon.

Global

This is an investment style that’s particularly suited to anyone wanting a one-stop, diversified portfolio, as it embraces stocks from around the world. Instead of focusing on one particular market or region, such as the UK or Europe, these funds bring in ideas across multiple regions.

For example, the Scottish Mortgage Investment Trust aims to identify, own and support the world’s most exceptional growth companies. According to its most recent factsheet, just under 55% of holdings are from North America, with a quarter hailing from Europe, 15% from Asia, and 5% from South America*.

Research all global equity funds

Buy and hold strategies

This is a strategy for investors that have confidence in the decisions made – even if their chosen investments suffer turbulence from time to time. Fund managers employing this approach will look to buy a stock that they have researched and believe will deliver decent returns, and then hold it in the portfolio for an extended period.

When building your own portfolio, this approach simply means committing to your chosen investments rather than buying and selling frequently and attempting to “time the market”. Regardless, investors should regularly review their investment portfolio and rebalance where necessary, this may include selling a fund.

Learn more about different investment styles and common strategies for investors in our free demystifying investment course, join the waitlist here.

*Source: fund factsheet, 30 September 2023

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