Investing According to GARP
Just when you thought investing was easy to understand - you put your money into shares, managed funds, property, fixed interest, cash, etc. – your adviser starts talking about “investment styles”!
In essence, what that means is how fund managers choose the underlying investments of their funds.
There are two traditional ways of choosing stocks that active fund managers use – growth and value.
- Growth managers choose shares or companies for which they expect capital gain through improved company earnings. They tend to look in areas of the economy that they expect to do better than the market average and companies within those areas with the most growth potential.
- Value managers look for stocks with undervalued assets. They analyse the company’s finances thoroughly to work out a ‘fair value’ for the stock and look carefully at the price to earnings ratios, price to book ratios, dividend yield and other ratios while doing so.
And then there is GARP or “Growth at a Reasonable Price” and Neutral.
- GARP is a mix of the Growth and Value styles. Here the focus is on stocks that have a stronger growth outlook than the market but which are cheaper than the average stock bought by a growth manager.
- Neutral style aims to make more consistent returns over time than either the growth or value styles. They do this by good stock selection.
Then there’s active vs index
In addition to active fund management, there is also index fund management. The latter aims to reflect a specific index like the S&P/ASX 200 in the stocks that the fund holds. Generally these funds will perform in line with the market.
So when your adviser talks about asset allocation, he or she is also taking into account diversification across the fund management styles as well. Then as the market moves through the business cycle, your portfolio is more likely to maintain or even increase in value.
Smart investing is not as easy as it sounds. That’s why your licensed adviser is there to do all the hard work for you.
