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Growth investing brings rewards By Rob Griffin
Investing for growth is certainly not a strategy for the faint-hearted, but as a way to potentially generate sky-high returns (in exchange for taking a relatively high risk) it can be pretty hard to beat. The idea behind "These companies can be quite expensive," says Justin Modray, a financial adviser at Bestinvest," and in sharp contrast to so-called value stocks which are often well-established names whose growth is forecast to be limited. A growth style suggests you're investing in something that doesn't look particularly cheap but that you believe will grow quickly over the next couple of years and trigger a substantial hike in the share price." Investment style As well as exciting young companies packed full of potential, growth stocks also include those classed as 'special situations', whose valuations have been severely damaged by factors such as past auditing problems or bad management. But this investment style is certainly not risk-free. By their very nature, growth stocks aren't stable, reliable outfits, such as tobacco firms, that can be guaranteed to deliver consistent returns most years, regardless of economic conditions. And while the share price of some will rocket as they develop into world-beating companies, a sizeable percentage either fail to live up to expectations or collapse completely and leave investors nursing heavy losses. The technology boom - and subsequent bust - illustrates the inherent risks. Back in the late 1990s, hi-tech stocks were all the rage as people ploughed their money into them in the hope they would eventually become global brands. Valuations soared to unsustainably high levels before crashing back down to earth and triggering a painful stockmarket slump. Why consider growth investing Few fund managers will allow themselves to get so over-exposed to one sector ever again. Ralph Brook Fox, a UK investment manager at Resolution Asset Management, says the focus is on companies that are not only capable of growing their earnings ahead of the market on a sustainable basis, they also need to have a valuation that stacks up. So who should consider growth investing? According to Paul Illot, senior adviser at Bates Investment Services, it is people without an immediate need for income. Younger investors, for example, could find the characteristics very appealing. That's not to say that older investors can't benefit. In fact, with life expectancy increasing, it may be prudent to have at least a proportion of your overall investment portfolio in growth-oriented products as you approach retirement. There are a number of ways to invest for growth. The riskiest route is buying the shares of individual companies whose share prices have the potential to soar over the next few years. For this, you'll need nerves of steel and a strong stomach. Most of us, therefore, would be more comfortable pursuing a growth strategy through an established investment fund. Rather than having to monitor individual names yourself, an experienced manager will do the hard work for you. Managers with bottom-up investment traits - focusing on individual stocks rather than specific industries or market cycles - can sit beside those whose investment decisions will be governed by their views on the global economy. One growth manager is Jeremy Lang. His Liontrust First Growth fund invests in a portfolio of at least 50 stocks from throughout the FTSE All-Share Index, and its profits growth should be greater than the market's expectations. Lang, who has been at the helm of the fund for more than a decade, adopts an investment process known as 'the Lang approach'. According to this, when a company announces higher-than-expected profits, analysts revise their forecasts, and this can drive share prices upwards as the market gets to grips with the news. Following on from this, companies that have recently surprised the markets with their profits have a tendency to do so again, so by focusing on these, Lang aims to identify stocks whose future potential is underestimated by the analysts. One such holding in his portfolio is Hunting (HTG), a Canadian oil services business. The company has been through a major restructuring which saw all its businesses - bar those in the core oil services area - sold off. Looking to the future, investment in the Canadian oil industry is booming and Hunting is expected to be a beneficiary. Its forecasts, for example, have been revised upwards three times during the past year. Growth investors don't need to limit themselves to the UK, taking a global approach can make financial sense, as long as you are sensible and don't make the mistake of putting all your eggs in one basket. You can, of course, balance riskier growth stocks with more stable names - it's all about diversification and striking the right balance for your individual needs. Investing for growth The pros You could make a lot of money quickly Being involved early in the next global megastar The excitement of being in a fast-growing area The cons Growth companies are hard to find Returns are volatile There's a strong chance of losing your money Where should you invest? We asked Justin Modray of Bestinvest to make some fund recommendations for investors with high, average and low-risk appetites: Higher-risk investors This category would include investors who are looking to invest over many years, such as those putting money away for their children, young pension savers or those who can afford to take more risk. They will obviously be looking to generate as much as possible over this period, but will have to acknowledge that the value of their portfolios may fluctuate. Investors following this strategy will probably have around three-quarters of the portfolio invested in stockmarkets. Within this, the UK exposure will have a greater emphasis on medium and smaller-sized companies.
Fund suggestions Standard Life UK Smaller Companies Rensburg UK Select Growth Merrill Lynch UK Special Situations
Average-risk investors Investors in their thirties or forties who have one eye on building a retirement pot would be classified as average-risk investors. Around 70% of their portfolio should be invested in stockmarkets, with around 45% of that in the UK. These people can afford to invest a little more in smaller companies than cautious investors. Fund suggestions AXA Framlington UK Select Opportunities Liontrust First Growth Cazenove UK Growth & Income
Lower-risk investors As well as those who don't like the idea of having a volatile portfolio, this category will also include investors who are approaching retirement and don't want to run the risk of losing their money if the stockmarket falls. In this case, a maximum of half of the portfolio should be invested in stockmarkets, of which around half should be in the UK and the balance overseas. It would make sense to combine an index tracker and growth funds with income funds to keep risk at a lower level. Fund suggestions
Cazenove UK Growth & Income Lazard UK Alpha Fidelity Moneybuilder UK Index
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