This is typically a good strategy to follow if you’re in or near retirement. Think of yourself as a farmer - and your pension pot as a fruit tree. Every year, you want to pick income from your tree without damaging the capital pot - your pension. But you also want the ‘harvest’ to grow each year - not because you’re greedy but because the cost of living is rising. This means that capital growth is of equal importance - the more your tree grows, the more fruit - i.e. income you can pick from it.
But here’s the rub, how can an investor ensure that their tree keeps growing at a time of drought. That might sound a bit dramatic, but in a low return world - growth remains as elusive as a decent income yield. This is a challenge not only for retirees but also for young investors who want to tap into good growth investments that can help their savings swell over time.
It’s fair to say that economic growth today is slower now than in the past, although that hasn’t necessarily been a bad thing for stock markets. Globally, but especially in Western markets, equities have soared in recent years. And the companies that have benefited most are the ones that are growing steadily regardless of the muted wider expansion in the economy.
As we head into 2018, the consensus view among the professional investors we talk to seems to be that investors shouldn’t be expecting a rerun of the stock market gains notched up this year. Instead, prepare for far more modest gains, with a bigger dollop of volatility. This should be expected as the Western world’s central banks slowly embark on the path to monetary normalisation, closing the taps of ultra-loose monetary policy that has flooded the systems with liquidity and helped asset classes like shares and property soar.
However, it’s worth remembering that when growth is scarce, investors tend to pay up for companies that offer it – and the higher quality the earnings, the more they are willing to pay. James Thomson, manager of the Rathbone Global Opportunities Fund, explains why: “If macroeconomic growth starts to slow down, investors actually buy growth companies as a proxy for stability in a world where there might be deteriorating economic growth.”
This is why Thomson holds a good slice of his portfolio in the credit card duopoly of Visa and Mastercard, both of which are benefiting from the continued switch from cash to card as well as Amazon.
The e-commerce giant is described by David Coombs, manager of the Rathbone Multi-Asset Portfolio as ‘disrupter in chief’. He points out that there is a new factor risk in equity markets: the Amazon Effect. “Share prices get beaten up simply on a rumour that Amazon may enter a company’s market – investors seem to feel the company is unstoppable.”
Amazon hasn’t just been ripping into retailers – it’s been hurting suppliers and manufacturers too, by offering cheaper alternatives to branded goods. Duracell is a case in point: you can buy 12 Duracell AAA batteries for £6.00 or 36 Amazon Basics AAAs for £5.69. These options are posted on the same Amazon webpage. Unsurprisingly, online sales of Duracell batteries have fallen drastically.
Amazon’s algorithms know more about what customers want than they do and as Coombs points out the company’s business model is quickly moving from simply selling stuff online to creating low-cost, high value services by fine-tuning processes to be as lean as possible.
Bottom-line? Owning Amazon today is viewed as much as a hedge against the risk of disruption itself alongside being a fantastic investment in its own right. Coombs draws the analogy with gold. Like the yellow metal, another popular hedge, Amazon is difficult to value. How much potential earnings are on offer from a company that is building such formidable defensive moats around itself? With both gold and Amazon, you can make arguments that it looks expensive or that it’s too cheap almost simultaneously.
Beyond Amazon, the technology sectors seem to be a quintessential area for growth hungry investors and while the sector has had a fantastic run this year, there’s no reason why this couldn’t continue into the New Year, as investors pay up for good, quality growth stocks. As Thomson puts it: “The technology sector is entering a period of explosive growth but you really want to wrap your arms around the gold standard in the technology sector - the companies that are disrupting, innovating and which can do so in a sustainable fashion over the long term.” Alongside Amazon and the credit card duopoly, Thomson also holds names like Adobe and Paypal.
The other area for the growth hungry investor to explore is emerging markets. While the region has had a strong run this year, there’s no reason why this can’t continue as the structural factors underpinning the emerging markets growth story haven’t gone away - from favourable demographics to a wealth of natural resources, a rising middle class and the majority of the world’s population. Two funds worth considering in this space are the Fidelity Emerging Market Fund managed by Nick Price, who aims to buy high quality companies at a reasonable price on the belief that prioritising quality will help the fund over the long term as emerging markets mature and investor focus shifts from the pace of growth to its sustainability.
Another good all-rounder, who boasts more than two decades of experience in the emerging market space is James Donald, who has managed the Lazard Emerging Markets Fund since its inception in 1997. He is supported by Lazard’s team of over 60 emerging markets investment professionals speaking 20 languages in 19 countries. Like Price, he looks for high quality companies at good prices.
Finally, if you’re looking for investments which offer both income and sustainable capital growth - global equity income funds like the Invesco Perpetual Global Global Equity Income Fund managed by veteran investor Nick Mustoe and the Fidelity Global Dividend Fund managed by Dan Roberts could fit the bill. These funds benefit from the fact that their managers can cherry-pick the best investments from across the globe.
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