CHRIS BURRELL ’ S BLOG
little available to mathematically quantify risk . This is an area where portfolio measurement is lagging , although it is possible to look at the Beta risk , which measures the volatility of a stock relevant to market volatility . Some managed funds also report tracking error . However most investors would consider a defensive and growth at reasonable price portfolios to be lower risk than growth portfolios . So if portfolio returns are broadly in line with market , but the portfolio is lower risk , then the investor has achieved market returns with a lower risk portfolio . This is often the case with Burrell client portfolios .
Some clients however prefer a higher growth portfolio and indeed COVID delivered good returns on a number of growth stocks to the extent that it is difficult to justify the valuations on conventional mathematical calculations . Low interest rates make growth stocks more valuable as far as returns further into the future are discounted at lower rates to determine net present value . This means that growth stocks are worth more in lower interest rate environments as the weighted average cost of capital declines . A feature to understand with growth stocks is that those higher valuations in a low interest rate environment will be subject to greater degrees of volatility . If the stock does not in fact deliver the growth , or company announcements either exceed or fail to meet expectations , the stock will be subject to positive or negative reactions , which can be quite severe . Another way to express this portfolio construction issue is that portfolios that comprise solely of defensive and cyclical stocks may underperform in periods where the market is favoring growth , and so at the very least diversification away from the old favorites such as banks and resources to add growth at reasonable prices and growth at realistic prices is worthy of discussion with your adviser .
A rising tide floats all boats , the hard question is which growth stocks will maintain their market price in the long term .
Happy Investing
Chris Burrell Managing Director
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