I must warn readers upfront that we at Seneca are value investors, and are thus naturally sceptical about growth investing in its simplest form, namely buying the stocks of companies that exhibit the highest sales, assets, profits, growth, etc. However, we are equally sceptical about simplistic value investing, namely buying stocks just because they have low price-to-equity, price-to-book, price-to- sales ratios, etc.
"Mid caps by their very nature tend to be more 'growthy' than large caps"
The original 'value investing' framework set out in Benjamin Graham and David Dodd's 1934 classic Security Analysis was about so much more than simple valuation ratios. How could it not be with 725 pages?
In fact, although Graham and Dodd are considered the fathers of value investing, they never even used that term. For Graham and Dodd, what would later become known as 'value investing' was as much about the quality of a company as it was about assessing valuations. And assessment of valuation involved an intricate calculation of intrinsic value, rather than just a cursory glance at PE ratios.
And that is how we see value investing. Although we have a focus on quality and value when it comes to picking stocks, we also have a focus on UK mid caps. Mid caps by their very nature tend to be more 'growthy' than large caps - they are smaller so they have more scope to grow - so my suggestion is to think about 'UK Growth' more in the context of seeking out good value mid caps than large caps that are higher growth but may well be expensive.
This is the difference between on the one hand a simplistic definition of growth that has evolved because index providers now offer simple-to-construct growth indices, and what I would argue is a more sensible approach to thinking about 'UK Growth'.
Right now, the pay-out ratio of large caps is 240% which means there is not much scope for growth. Mid caps look much better, with a pay-out ratio of 61%. And our UK holdings? Not only is their pay-out ratio just 54%, but they have a healthy dividend yield of 4.2%. With their strong balance sheets, this means you are getting both growth and value.
Published in Investment Week
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.