Global equities: Thinking outside the box for more breadth and sustained alpha
Which option is better: to invest in companies expected to rapidly grow their earnings over time, almost regardless of their price? Or stocks that seem a better bargain now, based on how cheaply they are valued relative to their earnings, dividends, or book value of tangible assets?
The past couple of years have added plenty of fuel to the fire. Through a decade and a half of growth outperformance, low interest rates effectively reduced the opportunity cost of waiting for businesses to grow into their price. Value turned the tables in 2022, alongside higher rates and inflation, only to falter through the first half of 2023. Does the recent tear by AI-related stocks presage another extended growth run? Or will inflation stay high, helping value get the last laugh? The debate rages on.
The age-old struggle between growth and value
Adding to the ambiguity, it is not always easy to categorise stocks. Take energy stocks — generous dividends, cyclical earnings, massive capital base that dampens price-to-book — all scream “value,” right? Yet, as of April, most major energy companies were grouped in the S&P growth index. As another example, Meta was listed in value, and Microsoft, in growth and value.
Some of these are statistical quirks. For instance, a product of the growth index’s heavy weighting towards change in earnings and sales growth (boosted by last year’s high energy prices). But these anomalies also result from an often-overlooked aspect of the growth versus value debate. Beyond their roles as investing styles, growth and value each represent different characteristics exhibited in varying measures by every stock.
That’s also part of the problem with many traditional “core” portfolios. A portfolio that equal-weights growth and value stocks relative to the index may limit the fallout from style shifts; however, unless it has a cohesive approach for evaluating individual companies, it may struggle to generate alpha.
A framework for finding value in growth, and vice versa
At PineBridge Investments, our alpha comes from assessing the value of current and future earnings potential of companies relative to other stocks within their specific stage of growth.
We call this framework lifecycle categorisation research (LCR), and we invest across a range of categories. We own mature stable companies growing slowly but with healthy cash flows more resilient to economic downturns; high stable growth companies favoured by low inflation; both fast-growing and mature cyclicals. Within each category we use the most appropriate valuation methods to better determine the likelihood of a stock outperforming the market’s expectations of it.
Lifecycle categorisation research framework
As the name implies, lifecycle is about movement: weathering movements in the macro environment and capturing movements within individual companies. We don’t need companies to change categories to be a good investment. But if they’re going to move, we want them to move left in the chart above, toward a more kinetic growth stage and the higher multiple that tends to command.
About six years ago, we were evaluating a large European pharmaceutical company[1]. At the time, we rated it as mature stable. It had hit our radar, though, because the sector analysts who collaborate across different PineBridge equity teams were researching the improving access to health care in China and noticed the drugmaker had a then-small business there. We bought the stock.
Fast-forward six years, we now categorise the company as high stable growth. At various periods during that time, our index has classified it as a “growth” stock and as both “value” and “growth.” Of more interest to us, its earnings growth rate has accelerated, and its price-to-earnings ratio expanded.
We see this as a typical example of our framework in action, and of the importance of teams collaborating in a structured manner across different parts of the global markets. Only then, we believe, is it possible to find the hidden value in the companies we research.
To explore more details about how investors can build a diversified global equity portfolio more resilient to style shifts and volatility across market cycles, register for our webinar “Is Your Focus on Style Investing Giving You ‘Bad Breadth’?” and access our latest research paper.
[1] For illustrative purposes only. The selected case study has been chosen by PineBridge to illustrate the investment process. It is not necessarily representative, or indicative of all investments made in the existing strategy or fund. Information provided about a portfolio company is intended to be illustrative and should not be used as an indication of current or future performance of any security, investment, or portfolio company. Prospective investors should be aware that these summaries are selective by nature, do not include all of the transactions made by the Manager's investment team on behalf of the composite and are not necessarily representative or indicative of all of the investments in the portfolio for any period. Past performance is not indicative of future results.
Disclaimer:
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.
