Value and growth: two sides of the same coin?

Value and growth: two sides of the same coin?

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Are value and growth strategies, often seen as at opposite ends of the investment spectrum, really that different? Answers from Carl Auffret and Isaac Chebar.

shared philosophies

“To find quality companies, you have to know them well,” says Carl Auffret, head of European growth stocks at DNCA Finance, an affiliate of Natixis Investment Managers. “Value and growth investing are both about getting to know a company over time, building trust in it, and waiting for the right time to buy or sell.”

To do this, DNCA organizes numerous meetings with companies, face-to-face, at their headquarters and at other sites. This approach involves tracking all of a company’s actions, calling management to ask for more details, and listening carefully to explanations.

“It may seem simple, but it takes a disciplined and comprehensive approach,” says Isaac Chebar, head of European value strategy at DNCA.

Of course, the execution strategy of a value portfolio and a growth portfolio is not the same and their composition is different. But they have a lot in common when it comes to stock picking. For example, DNCA believes that the macroeconomic environment should not influence stock selection for either strategy.

The DNCA experts are also convinced of the potential of simple long-only management, which allows the investor to be a long-term partner of the companies in the portfolio and to collect capital gains when the company is performing well and as its share price rises. Finally, they believe that both strategies should ignore benchmarks and, above all, consider ESG factors as a central element of value creation and risk mitigation.

Value: in search of hidden catalysts

The value management style often boils down to buying when the price is low and selling when the price is high. In practice, finding pockets of value is an exercise that requires more nuance and, for DNCA, that can only be carried out by investors with very detailed knowledge of companies.

The analysis performed by Isaac Chebar and his team focuses on the quality of the management team, historical cash flows and, most importantly, the balance sheet. The team avoids companies that are highly leveraged, have high debt service costs and are unable to launch acquisitions when opportunities arise. “Balance sheet review is really important,” says Isaac Chebar . “If a company has a low cash reserve to service its debt, we work for the bondholders. And we are not creditors.

DNCA’s value management team also stays away from companies whose cash flows are dependent on macroeconomic shocks, whether it’s rising commodity prices or war.

By focusing on debt and cash flow and taking a long-term perspective, DNCA can diversify its portfolio of undervalued stocks by gaining exposure to various sectors, including cyclicals.

“We don’t like the term ‘value’ as such,” says the manager. “We prefer to talk about ‘undervalued assets’ or ‘prudent management approach’.” For DNCA, value management consists of finding assets that are undervalued at a given time and whose potential will be recognized later by the market.

Isaac Chebar sifts through the market looking for companies that have lost market confidence for no good reason. “The market sometimes confuses volatility with the risk premium,” he says.

Most companies are sensitive to short-term impacts, such as restructuring, management changes, market ups and downs, pandemics or wars. And Isaac Chebar continues: “You buy when the market places a high risk premium on a stock, you wait for other investors to identify the catalyst for change, and you hold until the risk premium falls again and the multiples increase again.”

Rising valuation multiples can take many forms, but investors don’t always realize it. This is when monitoring companies over long periods of time and communicating regularly with management teams becomes a real benefit.

Prudent management of growth stocks

If DNCA views value management as “prudent” management, so does its philosophy of managing growth stocks. The management team requires companies to steadily increase their turnover by at least 5% per year and to maintain this trend for many years. Sales growth must be on a like-for-like basis, without taking into account fluctuations in exchange rates, mergers and acquisitions and other one-off events.

“We are looking for real growth”, explains Carl Auffret, “and achieving real growth of 5% per year is not easy. You have to be very competitive, determined to gain market share, launch new products and penetrate new territories. It is a difficult exercise.”

What unites all these characteristics of growth is the quality of leaders. And, once again, knowing how to assess the reliability of a management team requires detailed knowledge and regular communication.

Growth stock portfolios are necessarily smaller than value portfolios and are made up of a handful of high-growth sectors, such as healthcare, technology and even specialty chemicals. Carl Auffret continues: “There is a natural sector bias. This is logical because the growth potential is very low in oil, finance, media and telecoms. Stock prices are important because the premium for high-growth sectors can reach unreasonable levels.

In addition to revenue growth, companies need to improve profit margins without reducing capital or marketing expenditures in order to fit into DNCA’s portfolios. DNCA also looks for companies with high barriers to entry, such as strong brands or advanced technology.

Finally, like its value approach, DNCA also requires growth stocks to present sound balance sheets in order to survive crises and demonstrate opportunism on the mergers and acquisitions markets.

ESG, a powerful driver of value and growth

In portfolios of undervalued equities, ESG factors have a significant influence on increasing company valuation multiples. Ignoring these factors can undermine this process. “Poor ESG practices – linked to products and company activities – can destroy value,” says Issac Chebar. “We therefore focus on transition, encouraging companies to improve their practices over time.”

Isaac Chebar prefers to help companies improve rather than exclude them from portfolios for insufficient ESG standards. This potential for improvement can be released in particular thanks to good governance, a criterion which is at the heart of the selection process for growth stocks and DNCA value stocks.

In growth stock portfolios, governance is particularly important in attracting and motivating employees. “If you don’t recruit the best talent and retain them, your business cannot grow,” says Carl Auffret. For example, companies in the pharmaceutical and biotechnology sectors must attract R&D talent, while luxury brands must recruit ambitious and competent marketers.

To some extent, ESG is a natural component of a growth portfolio, according to Carl Auffret. “The environmental part is relatively easy for us, because our sectoral bias takes us away from highly polluting sectors and directs us towards low-carbon sectors”, he explains.

Value and growth, two management styles that are more alike than they are opposed

Value and growth approaches are generally considered to be completely different management styles. “But active management actually makes it possible to adopt similar approaches for these two styles,” adds Carl Auffret.

Despite their differences in execution and portfolio composition, value and growth approaches in European equity markets share the same objective. “To know how to generate risk-adjusted performance superior to that of the market over the long term,” concludes Isaac Chebar.

Completed writing in June 2022.

DISCLAIMER: Reserved for professional customers only. All investments involve risks, including the risk of capital loss. The delivery of this document and/or a reference to specific securities, sectors or markets in this document does not constitute investment advice, a recommendation or a solicitation to buy or sell securities, or an offer of services. Investors should carefully consider the investment objectives, risks and charges relating to any investment before investing. The analyzes and opinions mentioned in this document represent the point of view of the referenced author(s). They are issued on the date indicated, are subject to change and cannot be interpreted as having any contractual value. In Switzerland: This document is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.
NATIXIS INVESTMENT MANAGERS Paris 453 952 681 Capital: €178,251,690 43, avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com
DNCA FINANCE – An affiliate of Natixis Investment Managers. Management company approved by the Autorité des Marchés Financiers under number GP 00-030 on August 18, 2000. 19, place Vendôme – 75001 Paris. www.dnca-investments.com

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