Ian Cowie: why investors shouldn’t bet the house on growth shares

Whether or not value makes a sustained comeback, our columnist explains why it makes sense to have a mixture of investment styles and assets.

How can investors protect themselves from the risk that inflation might be about to rise dramatically? That question has seemed somewhat hypothetical for nearly 30 years now but gained fresh immediacy this week when Mr Market began to fret about the medium to long-term economic effects of short-term stimulus packages being pursued around the developed world to counter the impact of the coronavirus.

In plain English, bond and share prices both fell when stock markets did what they are supposed to do; attempt to forecast the future. The worry is that what’s good for employment might be bad for many ways of storing wealth as a vast increase in the money supply debauches the currency by reducing its real value or purchasing power.

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The sums involved are unimaginable. In the first two months of the pandemic, governments injected $10 trillion (£7 trillion) into the global economy, three times more than the response to the 2008–09 financial crisis, according to the consultants McKinsey. Now newish American president Joe Biden aims to throw another $1.9 trillion on to the bonfire in a bid to warm up the biggest economy in the world.

George Lagarias, chief economist at the accountants Mazars, observed: “Stock market performance is still driven by exceptional monetary stimulus. Inflation figures are expected to materially climb.”

Coming down from the clouds, this could be bad news for ‘growth stocks’ - including investment trusts which promise ‘jam tomorrow’ or future gains but pay no income today - and good news for ‘value shares’ - including investment trusts that yield decent dividends now and pay us to be patient.

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To be fair, investors who have been in the market for more than a decade have heard that one before - but growth stocks have beaten the pants off value shares for many years.

However, one of the lessons of history is that we should beware ‘recency bias’ or a tendency to assume that the recent past will be repeated forever in the future. Analysis by Schroders demonstrates the danger of investing on the basis that yesterday’s winners will also be the winners of tomorrow.

In 1970, just five firms - the technology giant, International Business Machines (NYSE:IBM); telecommunications group AT&T (NYSE:T); General Motors (NYSE:GM); analogue camera and film-maker Eastman Kodak (NYSE:KODK); and the oil major Exxon (NYSE:XOM) - accounted for 24% of the value of the S&P 500 Index. Two had fallen out of the top five by 1990; four had gone by 2000 and none are left in the top five now.

Today, the S&P 500 Index is led by Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Facebook (NASDAQ:FB), which account for 22% of the value of this index. But Schroders shrewdly observes: “Top dogs by market capitalisation tend to be eclipsed or disrupted every decade.”

That’s why - although I am glad to have exposure to those low or no-yield stocks via Polar Capital Technology (LSE:PCT) investment trust and directly in AAPL - I intend to retain lower growth but higher yield rivals for a diversified portfolio.

Henderson Far East Income (LSE:HFEL) is an extreme example of this, delivering 7.2% income but dismal returns of 0.1% over the last year; 63% over five years and 90% over the last decade. HFEL is bottom of the Association of Investment Companies (AIC) Asia Pacific Income sector over all three periods.

BlackRock Latin American (LSE:BRLA) is also a high-yield low-return disappointment, paying 4.9% income but destroying 20% of my capital this year, according to Morningstar via the AIC.

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Jupiter Emerging & Frontier Income (LSE:JEFI) has proved another value trap from which it has proved difficult to emerge, yielding 4.3% but negligible total returns.

The warehouse-owning, online shopping beneficiary, Aberdeen Standard European Logistics (LSE:ASLI), is much the best of my high yielders. It pays 4.1% income and delivered a Property-Europe sector-topping total return of 38% over the last year.

The fact remains that you cannot call your portfolio diversified if all its constituents are going up at the same time. For those of us whose aim is to achieve sustainable growth and income, eventually to fund retirement, it makes sense to spread our assets over uncorrelated sectors and investment strategies.

This should include some yielders to shield us from any increase in interest rates and inflation. That must be safer than relying solely on tech funds and shares that are soaring now but might slump in future.

Or, as an Australian colleague used to say: “Remember, today’s peacock is tomorrow’s feather duster.”

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie owns shares in Aberdeen Standard European Logistics Income (ASLI), Apple (AAPL), BlackRock Latin American (BRLA), Henderson Far East Income (HFEL), International Business Machines (IBM), Jupiter Emerging & Frontier Income (JEFI) and Polar Capital Technology (PCT) as part of a diversified global portfolio of investment trusts and other shares.