How to invest $100k for growth

Tue 12 Mar 24, 12:59pm (AEST)
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Source: Livewire Markets | David Lane, Ord Minnett

Key Points

  • Markets have experienced a shift from defensive to growth amid growing rate cut expectations and a sound economic backdrop
  • David Lane from Ord Minnett has built a mock portfolio which focuses on international ETFs and individual stocks for growth
  • Portfolio allocation includes global momentum and quality ETFs alongside Australian mid-cap stocks, reflecting a shift towards high-growth strategies amidst changing market dynamics

In October last year, I engaged the services of David Lane from Ord Minnett to participate in a thought experiment, answering the question: "How to invest $100,000 safely?"

The investing world has changed significantly since then, however, becoming decidedly more bullish on the back of inflation normalising and rate expectations changing. These factors have lit a fire under growth assets and the more appropriate question now seems to be, "How to invest $100k for growth?"

Without further ado, here are Lane's thoughts on the matter.

With markets hitting all-time highs in Australia and the US, have investors been keen to take on more risk?

It definitely appears so. Even though we have had a cautious outlook for US equity markets for some time, based on the high valuations and the overly optimistic expectations of rate cuts in the short term, markets have continued to rally.

We have experienced our clients expressing a desire to have a higher exposure to growth assets and prepared to accept more equity risk.

To date, however, the majority of this increased risk tolerance has been concentrated at the larger end of the market. This has been the case in the US with the ‘Magnificent 7’ (or should they now be the ‘Sensational 6’?). Similarly in Australia, the major banks are trading near record highs and the large caps have continued to command a significant premium over small caps.

For those who are seeking risk, what strategies have you been employing?

The investment factors that have been very successful over the recent market rally have been ‘momentum’ and ‘quality’, and these are the factors most aligned with growth investors.

Momentum essentially means “If you’re on a good thing, stick to it”. The shares that have been performing well continue to attract investors – this has been the case with the ‘Sensational 6’. By investing in shares with strong recent performance, you aim to continue to ride this outperformance. This factor has been supported by economic theory and empirical evidence.

Quality seeks to invest in companies that have strong balance sheets with low financial leverage, a history of generating profits and long-term earnings stability. Although this does suggest the investments would be boring, that is not necessarily the case. Quality businesses consistently perform throughout economic cycles and include many household names.

Although over the last few years, small companies have underperformed the large caps, we believe that this gap is likely to change over the next 18 months. There has been a significant divergence between the performance of large caps and small caps, since early 2022. With many of the larger stocks now getting expensive, and smaller companies both being fundamentally cheap and having the potential for greater earnings growth, we believe this gap will close and smaller companies will begin to outperform.

If a client walked into your office tomorrow with $100K and said I only want to invest in growth, what would the portfolio look like?

  • $20,000 iShares MSCI World ex-Australia Momentum ETF (CXA: IMTM)

  • $20,000 VanEck MSCI International Quality ETF (ASX: QUAL)

  • $20,000 VanEck Australian Equal Weight ETF (ASX: MVW)

  • $5,000 Alliance Aviation (ASX: AQZ)

  • $5,000 Capitol Health (ASX: CAJ)

  • $5,000 Ramelius Resources (ASX: RMS)

  • $5,000 Qoria (ASX: QOR)

  • $5,000 Select Harvests (ASX: SHV)

  • $5,000 SRG Global (ASX: SRG)

  • $5,000 COSOL (ASX: COS)

  • $5,000 WebJet (ASX: WEB)

Why have you allocated that way?

The first two ETFs provide exposure to the factors discussed previously – Momentum and Quality. Both are international ETFs and provide diversification for a relatively low cost, in an easy-to-access investment.

IMTM provides exposure to global companies outside of Australia that have been performing well such as NVIDIA, Meta Platforms, Amazon, Apple, Novo Nordisk, Toyota, Eli Lilly and Broadcom. This currently has a geographical listing exposure of around 67% US and 15% Japan.

QUAL has a more US-centric portfolio, with ~75% of the holdings based there. This ETF also provides exposure to many of the ‘Magnificent 7’, although it does not hold Amazon or Tesla as these do not have a history of having consistent profitability. It has holdings in NVIDIA, Meta, Microsoft, Apple and Alphabet. Additionally, companies such as Eli Lilly, Novo Nordisk, Visa, ASML, CostCo and Adobe are included in this portfolio.

MVW provides an ‘equal weight’ exposure to the ASX, thereby reducing the natural overweight exposure to the major banks, BHP, RIO & CSL that many Australian portfolios tend to have, while still having some exposure to these stocks. This means that there is an exposure to mid-cap stocks that are often under-represented in index-based investing in Australia. Due to the quarterly rebalancing of the ETF, it does benefit from short-term momentum in share prices. Over the long term (3, 5 & 10 years), this ETF has provided a superior total return than the S&P/ASX 200 Index.

Growth investors are more willing to accept risk and are seeking investments that have the potential to outperform the broader market. Hence, having some exposure to individual stocks does suit this style of investor – as long as you can live with the volatility and be more active in the management of the portfolio.

The individual companies selected are stocks that are rated as BUYS by Ord Minnett’s analysts and have forecast total returns of over 20%. Our analysts focus on emerging growth companies and provide in-depth research into these and other listed Australian companies.

Note that we have assumed that as growth investors, the client is comfortable with being fully invested (ie. not holding additional cash), and would be willing to actively manage the portfolio (or have it actively managed by their adviser). Hence, we would look to trade these individual holdings where appropriate and haven’t selected them as ‘set-and-forget’ investments.

How does this portfolio look different from the one you might have suggested 12 months ago?

There has been a greater appetite for risk, and investors are now beginning to position portfolios for the potential end of the rate-hiking cycle. Historically, this has been a time to position the portfolio towards emerging growth stocks.

Some of the specific stocks selected are new to our portfolios, as Ords has recently added to our research analyst team, specifically with senior analysts in technology and agriculture.

What would be the biggest risks to a high-growth strategy over the next 12-24 months?

Growth investing is heavily dependent on investor sentiment, which has been more positive of late. However, success for such a portfolio is dependent on this sentiment remaining positive.

Potential risks do exist, especially the potential of the prices of the ‘Sensational 6’ to begin to reverse if investors determine they are too expensive, and profit-taking begins to take hold.

Market expectations about the speed and size of future interest rate cuts in the US may be too optimistic and could be a trigger for a market correction.

Global geopolitical risks are ever-present and have the potential to trigger a reversal in the current risk appetite for high-growth equities.

Investing in individual stocks also introduces company-specific risks, which could cause negative share price movements. It is important that investors understand these risks, and are conscious to actively monitor their portfolio.

This article first appeared on Livewire Markets.

Written By

Chris Conway

Managing Editor

Chris is the Managing Editor at Livewire Markets and Market Index. His passion is equity research, portfolio construction, and investment education. He is also very keen on the powerful processes that can help all investors identify great opportunities and outperform the market, and wants to bring them to life and share them with you.

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