Growth companies by definition are those that have substantial potential for growth in the foreseeable future. Value stocks are undervalued companies that can often provide long-term profits. However, the definition of what exactly a good value for a given stock is, is somewhat subjective and varies according to different perspectives. Other questions around value versus growth include:
- Are these constructs of value or growth really beneficial and why can’t you have both? – How do you define them?
- Are all stocks really only one or the other?
Defining these stocks can be difficult as even major indexes have a different methodology for categorising them. Some good value stocks have growth characteristics as well. There is also the opinion that the long-standing dispute between growth and value equity investors is obsolete due to both concepts becoming ineffectual as a result of the shift from active investment into passive investments.
Historically ‘big oil’, and the ‘tobacco majors’ have been viewed as both growth and value stocks at different points in time. But when “Environmental, Social, Governance” (ESG) research began with the simple premise that, companies with weak ESG practices run higher risks of future scandals and thus have a higher tail risk, there were plenty of examples within these types of companies to support this notion.
A major example of this being the Master Settlement Agreement (MSA) reached in November 1998 between the Attorney Generals of 46 states, five US territories, the District of Columbia and the five largest cigarette manufacturers in America regarding the marketing and promotion of cigarettes. As well as requiring the tobacco industry to pay the settling States billions of dollars yearly forever, the MSA also imposed restrictions on the sale and marketing of cigarettes. Then there is the BP Deepwater Horizon oil spill, regarded as one of the largest environmental disasters in US history, and as of 2018, clean-up costs, charges and penalties had cost the company more than $65 billion (Source: Reuters).
With the increasing awareness of ESG matters and of the many crises presently facing the world (e.g. urbanisation, resource scarcity and climate change) opportunities for ‘new growth’ arose. The renewable electricity market has witnessed exceptional growth in recent years facilitated by falling costs, innovation and global policy support. Renewables represented almost two thirds of the net new electricity capacity built in 2016, driven mostly by solar power and Chinese investment (Source: Quilter Cheviot).
‘New growth’ provides protection from the crises hanging over us and the challenges caused by changing demographics such as urbanisation. Half of the global population already live in cities, and by 2050 two-thirds of the world’s people are expected to live in urban areas. But in cities two of the most unrelenting problems facing the world today converge, poverty and environmental degradation. Poor air and water quality, insufficient water availability, waste-disposal problems and high energy consumption are intensified by the increasing population concentration and demands of urban living. Intensive urban growth can lead to greater poverty, with local governments unable to provide services for all people. Concentrated energy use leads to more air pollution with significant impact on human health. Urban development can magnify the risk of environmental hazards such as flash flooding. Pollution and physical barriers to root growth promote loss of urban tree cover. Animal populations are inhibited by toxic substances, vehicles and the loss of habitat and food sources.
In our SRI* models we recognise the worth of ‘new growth’ as both a solid performing investment strategy and a way to do some much needed good.
The investments in our portfolios aren’t just the latest fashion with a shelf life, their growth potential is linked to an increasing global need for these companies and the solutions they provide. Additionally, such companies will benefit from the increasing environmental regulation and policy (for example climate change laws) rather than be penalised by it and at the same time will not be vulnerable to scandal and risk like the ‘old growth’ stocks. New growth is already demonstrating its ability to provide superior returns.
*MitonOptimal UK offers a suite of SRI & Ethical Model Portfolios run by Paul Warner and Sarah Warner.
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