The vast majority of investors will have seen the value of their portfolios fall since the start of the year.
Stock markets around the world have tumbled as economic growth slows, inflation rises and war rages on in Ukraine.
Few investors have come out unscathed. But some are nursing far bigger losses than others.
Among those hardest hit are investors in companies that had seen their share prices rocket in recent years on the expectation of bumper profits in the future, rather than on proven profits today.
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These companies are known as growth stocks, because they show the potential to grow and expand more dramatically than average.
Technology companies tend to fall into this category – the likes of Tesla (down 41 per cent this year), Netflix (down 71 per cent) and Amazon (down 36 per cent).
Investors were happy to pay over the odds for their shares in the hope they would benefit from higher profits in future. But as these companies’ growth prospects start to look shakier, share prices have fallen.
An index of the world’s biggest growth companies, the MSCI World Growth Index, is down 22 per cent so far this year.
By contrast, investors in companies that are valued on the profits they are producing today have fared far better. These companies are known as value stocks, because they may not see astronomical growth in future, but are already producing a nice income today.
Energy, financial and consumer goods companies tend to fall into this category – for example Standard Chartered (up 24 per cent this year), Direct Line (down 27 per cent) and Unilever (down 2.9 per cent).
An index of value companies, the MSCI World Value Index, is down just 3.3 per cent so far this year.
So what should growth investors do now? If you have learned the hard way that your portfolio is packed full of growth stocks, should you ditch some, hold tight, buy even more – or buy some value stocks as quickly as possible?
Think twice before selling
Ed Monk, associate director at Fidelity International, warns against rushing to sell your growth stocks, saying: ‘Selling growth companies now means you are locking in any losses you have suffered.’
Jason Hollands, managing director of investment platform Bestinvest, agrees, and adds that growth companies may recover. Investors who have sold their holdings would miss out on the chance to benefit.
‘Over time, stock markets go through phases when either growth or value sectors are in the ascendency,’ he says. ‘Growth will have its day in the sun again, but it looks unlikely to be any time soon.’
Plug the gaps in your portfolio
Hollands recommends that investors with portfolios tilted too heavily towards any one investing style should try to balance up.
Data from investment platform Interactive Investor suggests that a lot of its customers are doing just that. Among the most-bought stocks on the platform last month were value stocks Lloyds, BP, Legal & General and Glencore.
Hollands says if investors want a quick way to add value to their portfolio, they could consider a low-cost passive fund that tracks the performance of the UK stock market.
‘The UK stock market has the highest proportion of value companies of any major market,’ he says. ‘That is one of the reasons why the UK stock market has proven relatively resilient so far this year.’
Growth stocks may be a bargain
The share price of some growth companies has taken such a hit that they may now represent a bargain.
Gavin Haynes, an investment consultant at Fairview Investing, says: ‘Don’t be afraid of considering growth funds if you don’t already hold them, as recent falls have made them better value.’
But don’t get carried away
While it is good to balance up, don’t get carried away prioritising one investment style over another. That is what got growth investors into trouble in the first place.
Ian Millward of independent advisers Candid Financial Advice says: ‘Ignore market noise and the trends of the day.
‘The danger of making big pendulum swings in terms of investing style is that you are likely to mistime them. So focus on putting your portfolio on a sure long-term footing instead.’
Here are three value and three growth funds you could consider to help you rebalance:
Three value funds to consider
JOHCM UK Dynamic (Ongoing charge: 0.67 per cent)
Fund manager Alex Savvides invests in UK companies that he believes are changing for the better, for example as a result of a change of management. The biggest holdings include Vodafone and Barclays. Haynes says: ‘The current focus is on larger UK companies that should do well even in a period of high inflation.’
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Jupiter UK Special Situations (Ongoing charge: 0.76 per cent)
This fund has been managed by Ben Whitmore since November 2006 and he rarely meddles with it. Dzmitry Lipski, head of fund research at Interactive Investor, says: ‘The manager recognises that realising value can take a long time, so the average holding period for a stock is high, with fund turnover low.’ Top holdings include GlaxoSmithKline, BP, Shell and Aviva.
R&M UK Recovery (Ongoing charge 1.10 per cent)
This £232million fund invests in nearly 250 UK companies that manager Hugh Sergeant believes offer a bargain. Lipski says: ‘Sergeant has an impressive record over three decades of investing, and has managed the fund since its launch in 2008.’ Top holdings include BP, Shell and HSBC.
Three growth funds to consider
Janus Henderson Global Sustainable Equity (Ongoing charge: 0.85 per cent)
This fund invests in the big themes reshaping the world, such as decarbonisation and digitalisation.
But it does not invest in speculative ideas yet to be tried and tested. Top holdings include Microsoft and the world’s biggest semiconductor maker Taiwan Semiconductor.
Haynes says: ‘The downturn may offer a good entry point for this fund.’
Fundsmith Equity (Ongoing charge: 0.94 per cent)
Run by established manager Terry Smith, this giant £22.7billion fund has had a tricky year, with losses of more than 21 per cent.
But since its launch in late 2010, it has been one of investors’ favourites with good long-term returns. It focuses on a small portfolio of quality firms, including L’Oreal and Pepsico.
Rathbone Global Opportunities (Ongoing charge: 0.77%)
Monk likes this growth fund, which has fallen in value by more than 17 per cent over the past year.
The fund has been run by manager James Thomson since November 2003.
Top holdings include Microsoft, Alphabet, US semiconductor giant Nvidia, and the third largest retailer in the world Costco Wholesale.
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