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As a Growth investor, perhaps the biggest misconception is that all our attention is, and should be, spent on finding the most dynamic, fastest growing, companies out there. This is obviously a large part of what we focus our efforts on – trying to identify early those dynamic, innovative companies that are on the right side of change.
The biggest impact so far has been on small cap companies. Around 30% of companies listed on the small cap Russell 2000 Index are not making profits, and many of those firms were heavily funded by QE (the flow of money into biotechs has also been a factor here). However, if the Fed’s hikes are modest and controlled, there will be some negative impact on earnings, but it’s unlikely to be excessive.
However, there are two other Growth “buckets” where we also spend a great deal of time looking for opportunities. The first of these focuses on companies where we believe the market is underestimating the durability of growth. For example, we might like a company that is expected to grow at 10-15% per annum. In this instance, we don’t necessarily think that the company is going to surprise the market and grow by 20-25%. It is simply that we believe the potential runway for growth is much longer, more durable, than the market is anticipating. Instead of growing at 10-15% for three or four years, we might think it can continue at this rate for 10 years.

The third bucket in our Growth framework is made up of companies that are positioned on the wrong side of change, but which, through either self-innovation or market changes, can find themselves on the right side. Not only do these companies subsequently grow at a faster rate, they also experience multiple expansion, i.e. investors willing to pay a higher price for expected increased future earnings.
From a Growth perspective, one of the potential influences that I focus on is inflation expectations. Historically, a relatively low, stable inflation environment has seen Growth investing do very well. This is the environment we are currently in, and that is expected in the near term, but I am always looking for any changes in the outlook. So, I am also very focused on interest rates.
Finally, I am constantly watching for any early signs of recession. Historically, Value has significantly outperformed Growth during recessionary periods. One of the obvious signals of heightened risk seems to be when a misallocation of capital is evident, i.e. market bubbles. So far, I don’t see any obvious large pockets of misallocated capital.
- Category: Our thinking
- Tags: Thematic

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