Stock quality more important than investment style

Investors should focus instead on quality and an intersection of growth and value to get ‘quality at a reasonable price’, according to DNR Capital.

The firm’s recent study on ‘Qualifying Value and Growth’ showed that the history of the stock market saw periods where both styles – growth and value –  had been in and out of favour, even though growth stocks outperformed value counterparts to unprecedented levels since the Global Financial Crisis (GFC).

Therefore, DNR said, it was important in assessing portfolio exposure to understand different categories of both value and growth investing, with different opportunities and risk profiles.

“In informing DNR Capital’s investment strategy, this debate is a constructive lens through which to assess the broader market, but quality remains the core of our philosophy. We explore how a balanced approach to selecting the highest quality stocks delivers sustainable performance, without anchoring portfolios to a blind commitment to one style,” DNR Capital’s chief investment officer, Jamie Nicol, said.

The key takeaways from a study with UBS Quant and Strategy, which explored the quality measures, were:

1. The cheapest quintile of value stock actually underperformed the market significantly;
2. The growth factor produced highly inconsistent results with the second lowest and second highest growth baskets outperforming only;
3. Quality provided more consistent outcomes with the lowest quality basket significantly underperforming, while the highest and second highest quality baskets outperformed; and
4. The largest underperformance across the entire study was from lowest quality basket.

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“Exceptionally high-quality stocks are uncommon, require detailed and rigorous research to validate, and at times fall into either growth and/or value classifications. Economic cycles and the machinations of the market means both value and growth styles have their time in the sun,” Nicol said.

“We conclude that in this current environment of extremes, it is prudent to fall back on our process and philosophy of balance, without an overarching anchor to value or growth, but always with a strong bias towards quality.”