Growth or value investing in these times?

Growth or value investing in these times?
Written by Celine Tan
Tuesday, 02 June 2009 18:00

In the investment world, there are two broad investment styles -- value and growth investing. With stock prices around the globe experiencing major corrections in the past 18 months, should you be applying the value investing strategy?

Value investors seek stocks that they believe has been undervalued by the market. Some undervalued investments, which suffered acute fall in prices, are the result of overreaction to negative developments and this does not correspond with the investments’ long-term fundamentals, says Sharifatul Hanizah Said Ali, managing director of RHB Investment Management Sdn Bhd. “In such a scenario, value investors are likely to profit when the value of the assets, in which they invested at deflated prices, recovers.”

However, in the event that the investment suffers a drastic change in fundamentals -- from bad to worse, it will remain cheap for a long time. “Therefore, it’s crucial for one to be aware of the nature of your investment. This is even more so when it comes to value investing as some of these investments are under-researched and information may not be easily accessible,” says Sharifatul. Another common risk in value securities is liquidity risk, she adds.

Meanwhile, growth investors invest in companies that have a high-growth story, even if the price appears expensive. “While most growth investments yield decent returns [usually in line with the broad market], value investments can potentially yield exponential returns in the right market cycle [like small-cap stocks rally],” says Sharifatul.

You need to make a judgment call in determining the approach to your investment. “If you are of the opinion that the market recovery will be protracted and eventually spill over to the entire market, then it may be worth investing in value investments. Otherwise, it’s more advisable to invest in growth investments as they should move ahead of value investment,” says Sharifatul. “In essence, we prefer equity growth investments that are undervalued. We are also of the view that values are emerging among blue chips and fundamentally strong companies with good track records, prudent management and strong brand names. These established corporates would be the driver of growth and lead the economic recovery.”

Regardless of your approach, in deciding the intrinsic value of an investment, you are making certain assumptions, for instance, the expected revenue and earnings, says Chen Fan Fai, chief investment officer of Kenanga Asset Management Sdn Bhd. “If your assumptions are wrong, your valuation will be totally out – and this is where the risk lies.”

However, unit trust fund investors should not make the mistake of assuming that unit trust funds that have fallen in price appear to provide value. “In essence, a unit trust is a portfolio of assets. You cannot simplistically say that this unit trust fund, which has fallen from RM1 to 50 sen, is a good buy, compared with the one that has dropped from RM1 to 90 sen [both funds having the same investment mandates],” says Teoh Kok Lin, managing director of Singular Asset Management Sdn Bhd.

Alternatively, one can scrutinise the individual holdings of the stocks or bonds in the unit trust portfolio to gauge its value, says Sharifatul. “Assuming if the stocks are largely undervalued stocks and trade at steep discounts to their fair values, it is likely that the fund trades at a discount too or adopts a value investing strategy.”


http://www.theedgemalaysia.com/personal-finance/15495-growth-or-value-investing-in-these-times.html