Promise of growth may not offer best value

GOING for growth is not the best way for investors to build long-term wealth through shares, research has found.

A University of Adelaide study of more than 30 years of Australian share returns shows a portfolio of so-called growth stocks – companies seen as having potential for higher future returns rather than paying large dividends today – has performed worse than the overall market, and been riskier.

In contrast, “value” stocks – such as the big four banks, BHP Billiton and Telstra – have performed better than the overall market.

Dr Paskalis Glabadanidis, a senior lecturer at the university’s Business School and a researcher for its International Centre for Financial Services, says growth stocks are often priced as if they are perfect.

Investor sentiment and an overly optimistic view of future economic fundamentals can push prices too high, he says.

Popular growth stocks in recent years have included Domino’s Pizza Enterprises, health supplement companies such as Bellamy’s and Blackmores, healthcare and website operators such as carsales.com.au Glabadanidis analysed financial valuation ratios over three decades and his findings suggested investors should concentrate on shares with value characteristics. “Value portfolios had higher average returns and lower risks because they are associated with less uncertainty about their future economic fundamentals and because they have an established history of solid cash flows,” he says.

“Sorting stocks and combining them into portfolios based on high dividend yields tends to generate higher average returns than portfolios consisting of stocks with low or zero dividend yields.”

Catapult Wealth director Tony Catt says it’s wise to hold a mixture of value and growth shares. He says growth stocks are often more expensive “but you are paying for quality”.

“Growth stocks are usually finely priced and it doesn’t take too much for them to have some hiccups when they don’t deliver on their promises,’’ he says.

“Sometimes with value shares you have to be a little more patient – you are buying things that people have fallen out of love with,” he says.