Growth shares are still the way to go at this point in the cycle

Growth shares will deliver the best results over the long-term.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, Altium, EXPERNCECO FPO, and Xero. The Motley Fool Australia has recommended Freedom Foods Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ ASX Shares

a woman wearing a close-sitting hat featuring wires and thick computer screen glasses clutches her computer monitor and looks shocked and disturbed as she reads old-fashioned computer text from the screen.
Technology Shares

Here's why ASX 200 tech shares (ASX:XTX) outperformed today

ASX tech shares have taken a turn for the better today.

Read more »

Worker in hard hat looks puzzled with one hand on chin
Resources Shares

Why did the Rio Tinto share price (ASX:RIO) have such a lousy 2021?

We look at what happened to this ASX 200 mining giant's shares last year

Read more »

a miner wearing a hard hat smiles as he stands in front of heavy earth moving equipment on a barren mine site.
Share Gainers

Here's why the Rumble Resources (ASX:RTR) share price is climbing 5%

The mineral explorer's share price is on the rise amid promising drill results.

Read more »

share price high, all time record, record share price, highest, price rise, increase, up,
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Wednesday

Here are your top 10 biggest gainers in the ASX 200 on Wednesday.

Read more »

comical investor reading documents and surrounded by calculators
⏸️ ASX Shares

The ASX reporting wrap-up: WiseTech, Bravura, Seven Group

Just what the investor ordered. Here’s a recap of the companies that reported on Wednesday...

Read more »

Doctor performing an ultrasound on pregnant woman
⏸️ ASX Shares

The ASX reporting wrap-up: Ansell, Kogan, Nanosonics

Just what the investor ordered. Here’s a recap of the companies that reported on Tuesday...

Read more »

blue arrows representing a rising share price ASX 200
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Tuesday

Here are your top 10 biggest gainers in the ASX 200 on Tuesday.

Read more »

unhappy investor considering computer screen
Share Market News

The ASX reporting wrap-up: Charter Hall, Ampol, NIB Holdings

Just what the investor ordered. Here’s a recap of the companies that reported on Monday...

Read more »