By Leo Bland Schroders believes interest rate cuts in the US and UK in 2001 bode well for market re...
By Leo Bland
Schroders believes interest rate cuts in the US and UK in 2001 bode well for market returns next year.
Chris Rodgers, manager of the Schroder UK Growth Fund investment trust, said the group believes there will be two, quarter point interest rate cuts in the US and the UK in the first six to nine months of 2001.
He believes this will help arrest the flat returns posted in UK equity markets over the past 18 months.
Speaking at last week's Investment Week Investment Trust Markets Forum, Rodgers added growth investing tends to do best when growth is slowing and during periods of recessions.
He said: "Investment is about backing winners, although I would discriminate between a growth stock and a growth company.
"A growth company can only be known with hindsight. A growth stock is one that has gone up a lot or is expected to go up a lot, they can disappoint.
"On average growth does not tend to outperform but does tend to during recessions or periods of slowing growth.
"People are prepared to pay up for these stocks when growth is scarce. But when the economy comes out of recession investors buy value and cyclicals. We expect economic growth to slow at Schroders and hence one would want to be in growth stocks.
"But the extent to which growth is out of favour is perplexing. However this does present investment opportunities with good quality growth companies that are out of favour."
Rodgers added that growth investing is based on qualitative judgements about companies and requires investors to successfully project future earnings and assess the market's willingness to pay for that growth.
He said other key factors are fundamental research and taking a disciplined approach to valuations but added that intuition also has a place in terms of judging where the growth areas of the market are going to be.
Rodgers said: "The most highly-rated growth companies will ultimately disappoint and above average profitability is rarely sustained because it attracts competition.
"Value investment styles achieve superior returns on average so we look to be growth company investors with a value style. Everyone else will be fishing in among these stocks as well and they do not come cheaply. For every winner you are going to get many losers."
Rodgers added the components that make a successful growth stock are a growing market opportunity, excellent management capable of vision and execution of strategy and barriers to entry which restrict competition and allow high returns.
He also looks for companies with a profitable business model, which can include companies looking for their product to be adopted as an industry standard and those looking to drive costs down and achieve economies of scale.
Rodgers picked out Autonomy and Arm Holdings as good UK growth stocks as well as Pace Micro Technology, each of which is an overweight position in the Schroder UK Growth Fund.
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