Fund managers have warned that blindly relying on growth stocks to provide outperformance will not work in the changing economic environment.
Investors Mutual Limited (IML) head of research Hugh Giddy said that while a ‘scattergun’ approach used to work, investors would need to be more discerning in a market that is being driven by excessive leverage.
“The fundamental thing is that households and governments have too much debt and that debt environment means there is a real constraint on spending,” Giddy said.
“That’s an environment we see as being a pretty tepid environment for growth.”
He said in the next five to 10 years, investors would need to be very selective about the types of stocks they owned.
“That’s not to say you have to have value stocks or growth stocks, but you have to own stocks that are really able to grow or deliver for you through income despite the lack of growth,” he said.
Giddy expected to see dividends making up a bigger percentage of overall market return than what investors are used to – which is currently around half of total return.
On the other side, Aubrey Capital Management investment manager Lynne Thornton said growth equities were well positioned to outperform in 2011.
“We believe it is a year for growth equities as we see it as a year of inflation rather than recession, and equities rather than bonds.”
Thornton added that growth had outperformed income over the last 20 years, save for 2008 when the global financial crisis was a factor.
