There are lots of ways to invest. Half the job of choosing an investment fund is working out which you prefer. Depending on your investment goal, you may consider income, growth or a bit of both. There are myriad types of investment, from bonds, to real assets, to stocks and shares, to choose from.
In the world of stock investing, two approaches are often pitched against each other. One is investing for growth, meaning that the focus is on a company’s potential future revenues. The other is investing for value, by focusing on the price being paid for a stock against its current earnings.
The new norm
In recent years, it has appeared that the former has won out. To the untrained eye, it can seem obvious that you wouldn’t pay too much for a stock. Yet, ‘expensive’ growth companies such as the Magnificent Seven technology stocks have reigned supreme, capturing much of the markets’ attention.
However, there are some signs things are changing. Volatility – a measure of how much stock prices are moving – was significantly up in 2024. This suggests rising uncertainty in the market. News flow, such as the emergence of Chinese AI via Deepseek, has called big tech valuations into question for some.
Could this be the end of the growth era? As ever with markets, it’s complicated.
How we shop for stocks
For The Bankers Investment Trust, the three sub-portfolio managers and I take what I call a “valuation aware” approach to investing.
We focus on investing in established companies that are generating cash through current revenue. We believe cash is essential in two ways: first, to fund future growth through both internal and external investment. Second, to fund future dividend growth.
In seeking out this cash, we aim to not pay too much for a stock, but don’t set ourselves strict limits. This is where the ‘aware’ rather than pure ‘value’ comes in.
This lack of restriction has enabled us, for example, to build an overweight in Microsoft despite its heady share price. We believe the company’s investments into multiple technology streams – most notably AI – will pay off for investors over the long term.
On a broader scale, the flexibility in our approach is reflected in the average price we pay for a stock versus its earnings. This is expressed as P/E or price over earnings. The average in the Bankers portfolio is on par with that of the index. Meanwhile, our portfolio consists of just 100 of our best ideas from around the world, versus the index containing thousands of companies.
As a reminder, Bankers’ aim is to deliver capital growth and inflation-beating income over the long term. We believe that keeping valuation in mind is essential to achieving these goals.
Glossary
Bond
A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.
Dividend
A variable discretionary payment made by a company to its shareholders.
Capital investment cycle
The purchasing of fixed assets by a company for the purpose of supporting day-to-day operations.
Earnings per share (EPS)
EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Growth investing
Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value. See also value investing.
Inflation
The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
Overweight
Having a relatively large exposure to an individual security, asset class, sector, or geographical region than a relevant benchmark, such as an index.
Price-to-earnings (P/E) ratio
A popular ratio used to value a company’s shares, compared to other stocks, or a benchmark index. It is calculated by dividing the current share price by its earnings per share. It is calculated by dividing the current share price (P) by its earnings per share (E).
Valuation metrics
Metrics used to gauge a company’s performance, financial health and expectations for future earnings, eg. price to earnings (P/E) ratio and return on equity (ROE).
Value investing
Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase. One of the favoured techniques is to buy companies with low price to earnings (P/E) or price to book (P/B) ratios. See also growth investing.
Volatility
The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Disclaimer
There is no guarantee that past trends will continue, or forecasts will be realised.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
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