There has been a lot of commentary in the financial media about where investors should be positioning their portfolios. There is a lot of capital in Australia thanks to the superannuation sector as well as a large fund manager industry. All of that money has to be invested somewhere.
Some of the ASX's best growth shares like Altium Limited (ASX: ALU), a2 Milk Company Ltd (ASX: A2M) and Xero Limited (ASX: XRO) are trading at very high valuations.
However, high-performing fund manager Ophir Asset Management is cautioning against shifting completely away from growth shares. I think Ophir are worth listening to because over the past five years the Ophir Opportunities Fund portfolio has delivered an average gross return of 28.9% per annum before fees. The Ophir fund managers also have a lot of their own capital invested in their funds.
Ophir said that rotating a portfolio away from growth and towards value could be a mistake at this stage in the cycle. Larger cap ASX businesses are struggling to deliver meaningful and sustainable earnings growth. The ASX only performed so well over the past year due to a resurgence of resource businesses, which is unlikely to be repeated again.
The high growth shares do have a lot of expectations built into the current price and an earnings miss could result in share price declines, which may mean short-term investors head for the exits.
However, Ophir said that it's usually not earnings that miss estimates but estimates that miss earnings. I agree – if management give guidance and miss the guidance then that's the company's fault, but some analysts are too optimistic.
If growth shares continually beat expectations then the valuation gets more and more stretched until eventually it goes too high. However, Ophir said that this does not necessarily mean that the end of the growth cycle is occurring, simply an adjustment to expectations.
In this current economic environment of low growth it is the growth businesses that will deliver the best results over the longer-term. Ophir has lightened its positions, but a sell-off could mean it's an opportunity to buy back into those companies.
Ophir also said that 'value' shares are not actually trading that cheaply. The best time to pick up these shares are when they are at cyclical lows, which doesn't seem to be the case at the moment. Cheap shares can stay cheap for a long time. Increasing cash can be an appropriate response until opportunities present themselves.
Foolish takeaway
Some of Ophir's Opportunities Fund current positions include(d) Afterpay Touch Group Ltd (ASX: APT), Freedom Foods Group Ltd (ASX: FNP), A2 Milk and Experience Co Ltd (ASX: EXP).
I firmly agree with Ophir's mentality. Over a five plus year period, it is growth shares that will probably deliver the best returns, despite the current high valuations.
