Why it isn’t game over for growth stocks
Sell-off is an opportunity to buy quality stocks, says Legal & General GARP guru Gavin Launder
Among the high growth stocks which have sold off in the recent roiling of equity markets are online fashion phenomenon ASOS (ASC:AIM), online grocer-turned-platform, Ocado (OCDO), video games
services provider Keywords Studios (KWS:AIM), attractions software supplier Accesso Technologies (ACSO:AIM) and mixers marvel Fevertree Drinks (FEVR:AIM).
Other high-flying stocks such as Games Workshop (GAW) and litigation finance provider
Burford Capital (BUR:AIM) have been caught up in the correction. Yet one leading fund manager believes the markets rout is but a blip, and there are a considerable number of attractive growth stocks worth buying now.
Gavin Launder manages the Legal & General Growth Trust (B28PVN0), a £212m unit trust which puts money to work with companies the seasoned investor believes boast strong growth prospects.
L&G Growth Trust is an actively managed portfolio of 25, broadly equally weighted UK names. Launder adopts a ‘one in, one out’ approach to picking shares, forcing him to regularly review each position and promoting a strong sell discipline.
Put simply, this ensures only the best growth ideas remain in his concentrated portfolio, a facet of the fund that will comfort prospective investors alarmed by the recent market turmoil.
‘Because it is a one in, one out process, it could become quite high turnover, so we’re actually looking for good longterm secular growth stories that can be in there for multi-year periods,’ stresses Launder.
KEEP CALM & CARRY ON GROWING
‘I don’t think the world has changed dramatically,’ says Launder, addressing the recent sell-off in global equity markets blamed on a rise in US bond yields, fears over rising rates and trade war jitters.
‘Growth is still an attractive place to be. It is just that the valuation gap between growth stocks and value stocks had stretched, not so much by
You want to have a company with either barriers to entry or increasingly in the modern world, barriers to scale GAVIN LAUNDER – MANAGER, LEGAL & GENERAL GROWTH TRUST
growth looking expensive, but by value underperforming so much that it was looking very cheap and you’ve had that slight correction,’ he explains.
His view? ‘I think we just carry on.’ Rather than requiring earnings upgrades to continue powering the market, Launder thinks ‘reaffirmation that the growth is still growing will be supportive.’
‘When this first starts happening, people ask “are we switching from growth outperforming value to a long period of the reverse, or is it just a small correction?”. But we’ve had these corrections at some point every year for the last four or five years.
‘Personally, I think that’s all this is because when I look at the macro, the US is still growing well above average. Europe might have slowed, China might have slowed, but there are still longterm growth trend lines.
‘It has been quite a big correction and we’ve topped up quite a few things here and there. It has been spread across a number of names. None of them have dropped so much that we’ve put lots of money in but we’ve topped up quite a few names.’
Growth at a reasonable price (GARP) investor Launder is on the lookout for companies that display strong secular and structural growth trends and has ‘ambitions for this fund to get a lot bigger’.
His ideas are generated through a combination of fundamental bottom-up analysis and meetings with management, to assess the long term potential growth rates of a business.
Among the names to pass muster with the manager are the likes of engineering software firm
AVEVA (AVV), Ocado, Cineworld (CINE) and heat-resistant refractory materials maker RHI Magnesita (RHIM). Other positions include cyclical, yet strong growth companies such as equipment rental firm Ashtead (AHT) and Glasgow engineer Weir (WEIR).
ASOS: AT THE FOOTHILLS OF GLOBAL GROWTH
Launder can’t disclose his most recent purchases for compliance reasons, but he is highly enthused by the global growth potential of names in the portfolio including the aforementioned ASOS.
‘You want to be in a market that is growing, whether that is cyber or online retail,’ he enthuses. ‘And you want to have a company with a good moat, either barriers to entry or increasingly in the modern world, barriers to scale.
‘To get as big as ASOS is a bit of challenge now, because they are the biggest player, but there’s a lot of opportunity to keep on growing, and that’s just in the UK.’
He has added to Hungarian airline Wizz Air (WIZZ), recycling some of the profits generated from online fashion purveyor
Boohoo (BOO:AIM) into what he perceives as a good long term story.
ASOS has proven to be a fashion phenomenon