As with everything in life, the way we do things has to adapt to keep up with change. Change is now ...
As with everything in life, the way we do things has to adapt to keep up with change. Change is now a daily phenomenon, so it should come as no surprise that the UK market and investors' needs have changed dramatically over the past few years.
Most of us in the investment management community are used to such change and have become flexible and open to it. Those who have not adjusted their processes and strategies have rightly been made to suffer by unforgiving investors.
Growth is not just about technology. Technology is only part of the story. However, the technological revolution has crept into every corner of our lives. Just five years ago some of the largest FTSE 100 companies did not exist.
Technically, it has become impossible for growth funds to avoid technology, but they can go underweight, if needs be. By definition specialist, high growth 'themed' funds cannot do that. Therefore, specialist, high growth themes funds can only be used by investors who want to do their own asset allocating and feel confident to do so.
When UK growth funds first came about there was space for income funds, growth funds, income & growth and equity & bond (balanced, as was) funds. These products were delivering what investors needed at the time.
In the late eighties and early nineties, facilitated by the Pep, income funds were king, with income reinvested. However, the successful funds had a strong total return bias and a yield that could never have been accused of setting the Thames on fire.
Growth funds were seen as capital builders; there to provide a lift to the equity performance of income providers. Often, specialist funds, such as special situations and recovery, attracted the money for this purpose
Growth cycles last longer than value cycles and value had been one of the hunting grounds of the income fund manager.
Growth companies are in the ascent and have been for some time, with subtle, almost annual interruptions by cyclicals. Growth is the main game in town - value is like a grouse; it can only be hunted when in season. Equity yields are lower than they were, particularly in growth companies. Inflation globally is at historical lows. Interest rates, and bond yields similarly, are not as high as they used to be.
These days investors use equities for growth. This trend is on the rise as investors try to grow their capital for the long-term - retirement, future plans, and so on.
Demographics suggest this trend will continue. Corporate bonds are now seen as the income provider of choice and are easier to deal with, from an income tax perspective.
Delivering capital growth is often a marriage of styles. In the global investment market pragmatism is key. What has not changed is the need for the highest quality research into stocks.
Top-down at the sector level, now also involves running themes. Styles can differ greatly, but the target is the same - outperformance.
Growth investors can adapt to value cycles and vice versa. 'Growth at a reasonable price' has been with us for some time, as has 'earnings surprise'.
Fund managers must be true to their principles as that is what an investor expects. Flexibility must be within understood parameters and risk control guidelines. However, if an investor is specifically looking for a discrete style, they are out there.
UK growth fund
From a technical viewpoint, the standard UK growth fund has had to adapt. This is because the benchmark, usually the FTSE All-Share index, has changed.
When considering the question "Is the standard UK growth fund just a quasi tech fund?" one should appreciate that technology, media and telecoms currently account for about 30% of the All-Share index.
So 30% of the benchmark, by which it is judged, is orientated to technology. It is therefore not a quasi-technology fund by design, although, technically it cannot totally avoid it without taking a huge bet against the FTSE All-Share benchmark. It can however, underweight or overweight technology in favour of growth sectors.
Technology is growing across all sectors and that makes the need for proprietary research all the more important. The relatively new FTSE TechMARK All-Share index, the UK's equivalent of the Nasdaq covers pharmaceuticals also. Top-down analysis gives the fund manager a window on the market that allows him or her to appreciate to the benefits and risks of relative bets, either those already in place or what to do next. The old economy is slowly changing, taking on internet strategies in the fields of business to business, procurement, or ordering and business to customer.
A growth fund should also invest in those companies that have successfully adapted their business models to benefit from the opportunities presented by e-commerce.
Technology is itself growing and new technologies that benefit the business models of companies are developing all the time. Technology companies tend to be growth companies and, structurally, UK equity funds with a growth bias should have at least 30% in TMT. So, if they are growth investors it is not surprising that they have been or still are overweight.
There is a place for the standard UK growth fund in a portfolio. This goes back to the point about UK growth funds achieving capital growth were they can. A specialist, high growth themes fund would need to be flexible, adaptable, fleet of foot and this would be a contradiction. To properly utilise specialist funds in a portfolio the investor needs to be a shrewd asset allocator between themes, or sectors.
A diversified UK growth fund has the capacity to do this for the investor, within set investment limits. However, not every UK growth fund is the same. Some are more speculative than others.
The title of the fund helps differentiate the generalist from the 'pure' high growth fund. There are some UK growth funds that are a balance of risk
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till