A style for all cycles


Twenty or so years ago, portfolio diversification was a simpler concept. There were equities, bonds and property. Equity funds tended to fall into one of two camps – growth or value. Fast forward to the present and the combination of technology and product innovation has seen the emergence of new asset classes, investment approaches, and a broader range of investment terminology.

In this article, GSFM runs through the nomenclature of investment style as it pertains to equity funds, and provides clarity about each – what they mean and what they deliver for investors.

Investment styles

Like any trend, investment styles come in and out of favour. In the early days, stocks and managed funds tended to be classified as either growth or value; while this may still be applicable, fund managers now have a larger number of lenses through which to view companies, and a greater arsenal of investment approaches to employ when managing equity funds.

Even though there are more options today, a balanced approach remains critical; after all, the one thing we know about markets is that they are unpredictable and no one knows for certain which investment approach will prosper in the near term. There will be periods of time when different investment styles have markedly different performance outcomes. Ultimately, a diversified portfolio with a mix of different investment styles can help your clients achieve their investment objectives.


Growth investing is focused on capital appreciation. Fund managers who adopt this investment style generally invest in companies with above average growth, and which exhibit high levels of profitability and earnings growth ahead of their peer group.

Growth managers tend to look to the future, and typically invest in companies that have a solid earnings outlook, even if the share price appears expensive in terms of metrics such as the company’s price-to-earnings (P/E) ratio or price to book (P/B) ratio – the investor is willing to pay more today for a company’s future cash flows.

The characteristics of a typical growth company are as follows:

  • High P/E and P/B ratios
  • Low or no dividends – earnings are reinvested to grow the business
  • High earnings growth

A growth style investment tends to do best in buoyant market conditions; it would generally outperform the market when share prices are rising. Growth stocks also tend to do well when interest rates are low.

Conversely, growth investments tend to lose value in a bear market, often falling faster and harder. Growth funds are generally expected to offer the potential for higher returns; however, growth stocks and funds can be more volatile and may represent a greater risk when compared to other investment styles.  


Value investing is focused on unearthing undervalued companies. Value managers look for companies that have fallen out of favour but have good fundamentals; such managers are price oriented. Where a growth manager tends to be forward looking, many value managers use historical data to develop their pricing models.

Unlike their growth counterparts, value companies tend to have lower P/E and P/B ratios, as investors discount the potential earnings growth expected from the company. The concept that underpins value investing is that the price of shares in good companies will rebound in the future, when the underlying value is recognised by other investors.

The characteristics of a typical value company are as follows:

  • Low P/E and P/B ratios
  • Priced below the broader market and industry peers
  • Higher dividend yields

The key risk associated with value investing is that the market may have correctly priced the underlying company; there is no growth story and the company may not realise its intrinsic value. Value stocks often do well early in an economic recovery, but are more likely to lag their growth counterparts in a sustained bull market.

Growth at a reasonable price (GARP)

An investment strategy that aims to take and combine the best of growth and value styles, GARP funds appeared in the Australian investment landscape in the 1990s. GARP investors look for companies that exhibit consistent earnings growth above market levels (growth investing), but excludes those companies with very high valuations (value investing). In other words – an investment approach that seeks growth, but not at any price.

The goal of a GARP investor is to avoid the extremes of either growth or value styles, and build a portfolio of undervalued companies that are expected to experience earnings growth in the future. A GARP manager focuses on buying stocks that will increase in value for two reasons:

  • The stock is priced under their valuation target, with the objective that the price will rise over time
  • The stock has above average earnings potential, which will also cause its price to appreciate over time.

GARP managers should, in theory, deliver more stable returns than those of either a growth or value manager, and outperform the market during normal market conditions; they may underperform growth managers in a bull market, and possibly value managers in a downturn.

Style neutral or core

Another 1990s innovation, the emergence of style neutral (or core) managers sought to remove any style bias and therefore be less at the mercy of the market’s vagaries.

There have been two broad sub-groups within the style neutral manager cohort:

  • Style neutral – those managers who actively managed a portfolio of equities to ensure there is no style bias to the overall portfolio; it might hold a mix of growth, value and GARP stocks, however its overall positioning is neutral. The benefit of this approach is that the portfolio’s style neutrality should make it better placed to ride out all market conditions. While a style neutral fund may not perform as well as a growth fund in a rising market or a value fund in a bear market, it should provide consistent returns over varying market conditions.
  • Style rotation – while the style may be neutral over a market cycle, the portfolio may have a value or growth tilt as markets provide opportunities for each stock type to enjoy earnings growth. In other words, a manager adopting a style rotation approach will have a bias toward growth stocks in buoyant markets, and value stocks at other times.


Contrarian investing is a strategy characterised by purchasing and selling in contrast to the prevailing market trends and investment sentiment of the time. A contrarian believes that certain crowd behaviour among investors can lead to the mispricing of securities, which then leads to opportunity. As such, a contrarian generally buys poorly performing companies and sells them when they perform well.

There are some similarities between contrarian and value investing; in both, fund managers hunt for discrepancies in price between stocks to determine whether a specific company is undervalued in the current market, and both seek those undervalued companies most likely to turn a profit. A number of contrarian investors focus their research efforts on identifying distressed stocks to buy, and then sell once the company recovers.

High conviction/concentrated funds

Not so much an investment style as an approach, high conviction funds appeared in Australia with increasing regularity in the 2000s. The advent of managed accounts has seen a larger number of high conviction portfolios available to investors.

A high conviction – or concentrated – equity fund is one that generally holds a lesser number of stocks than a traditional fund. The former may hold as few as 10 stocks through to an average of 30, while a traditional fund may hold up to 100, usually driven by a combination of the fund’s size and risk management strategy.

An advantage of a high conviction portfolio is the potential for increased performance; conversely, the downside is greater risk as investment is spread across fewer companies. A more concentrated portfolio enables the fund manager to focus its research on a more manageable number of quality companies.

As well as investment styles, there are other aspects to consider – passive funds versus active. Long only versus long/short funds. Those with a wholly quantitative strategy. Different investment styles and approaches will perform differently across the market cycle and, as history has shown, not always as expected. It is important for your clients to understand how different investment styles may affect their overall portfolio’s performance in all market conditions.



This article provides general information only and has been prepared without taking account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of Grant Samuel Funds Management ABN 14 125 715 004 AFSL 317587 (GSFM) and sources believed by GSFM to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither GSFM, its related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of capital invested. ©2017 Grant Samuel Funds Management Pty Limited.

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