The headline of this article is a common one in financial journalism, pitching value shares against growth stocks. But is this the right mindset to have as an investor? And if so, which style should I favour next year? Here are my thoughts.
In simple terms, growth stocks are companies expected to expand earnings rapidly. Investors are paying up for future growth potential. Value shares, on the other hand, are those trading below what they seem worth, and are often mature firms with steady cash flow, dividends, and much lower expectations baked in.
The growth versus value debate is one of the oldest in investing. The style dichotomy is popular because we humans love neat categories (light versus dark, good versus bad, winner versus loser). Our brains are hardwired to simplify complexity.
The debate can also sometimes turn tribal (another relic of our evolutionary past). Boiled down, some in the growth camp see value investors as boring, while value purists view growth investing as little more than speculation (or downright naïve).
My view is that the divide is too simplistic, and not being wedded to a particular style can result in far better overall returns.
For example, I only used to invest in what would commonly be described as growth stocks. But in 2021, when these types of shares went bananas and were trading at ridiculous levels, I started to widen my horizon.
Since then, some of my best-performing stocks have been what might be considered ‘boring’ companies from the FTSE 100. Shares such as Rolls-Royce, BAE Systems, Games Workshop, and HSBC.
One stock that has been a particularly pleasant surprise is Aviva (LSE:AV.). Before I started digging into the insurer, I was bearish because the company had long struggled to build any lasting shareholder value.
Looking back, my starting assumption was that Aviva was probably a value trap. However, I soon saw a company that had sold off its low-returning overseas businesses and was doubling down on asset-light areas in profitable core markets (UK, Ireland and Canada).
Its sprawling global footprint had actually acted as an anchor, and with a narrower focus under strong management, I thought Aviva was in notably better shape than it was a few years prior.
I found the rock-bottom earnings multiple and ultra-high dividend yield very attractive. The evidence before my eyes was that the stock was a strong turnaround candidate, so I added it to my portfolio.
Aviva has returned 41% year to date, excluding dividends, far outpacing the FTSE 100.