Future proofing investment portfolios with long-term capital growth

Stock markets tend to reward patience. While they can be volatile and unpredictable in the short-term, they typically outpace other asset classes over the longer-term.¹ This can give investors with a long time horizon an advantage. They can overlook short-term volatility, and target higher growth areas. This can help them accumulate wealth and outpace inflation over time.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This is not just an advantage for those in their 20s and 30s just starting out in investment, but could also apply to older investors who want to ensure a portion of their portfolio is in high growth investments that keep pace with inflation and economic growth over time.

What does investing for growth look like in practice? While all stock market investment needs to be focused on long term capital growth to some extent, dedicated growth investing aims to achieve the highest capital return possible, within a risk-managed framework. It is distinct from investing to generate an income, or to meet a specific goal. It means tapping into long-term growth themes within the global economy, and it will almost certainly mean accepting higher short-term risk and volatility.

Why growth is important

Focusing on growth investments within a portfolio may give investors the best possible chance of beating inflation. Inflation is a major bogeyman for investors saving for the long-term. It will corrode the purchasing power of their savings. £10,000 invested in September 2004 would have had to grow to £20,800 by September 2024 just to have the same purchasing power. ²

The effect of inflation magnifies over time. Over one to two years, inflation at 2% (the current target for the Bank of England) may have little visible effect, but over 20 years – as this example shows – it can halve the real value of your money. ³ This can be a problem when investing in, for example, bonds, where the return is static and offers little defence against inflation.

Investing in the stock market can possibly be a useful way to protect yourself. Many companies have what is known as “pricing power”, the ability to raise prices over time. As a result, even if their costs rise, they can maintain their profits, which in turn should feed into a company’s share price and dividend payments. This is why stock market investment can have an advantage at times of higher inflation and it is one of the main reasons equities have historically done well through inflationary periods such as the 1970s. ⁴

Nevertheless, companies come in different flavours and not all will have this pricing power. They may be constrained by regulation, for example, or they may have a lot of competitors. By investing for grow than investor naturally targets those companies with pricing power.

Mega forces

Growth investors will also target areas of structural growth in the economy – i.e. areas that are growing independent of the health of the economy. This might be areas related to changing demographics, the energy transition, or digitisation. Aligning with these long-term trends can help build an investment portfolio aligned with the future.

Mega forces are significant structural changes in the global economy today and far in the future. They can change the long-term growth and inflation outlook and may create big shifts in profitability across economies and sectors, creating new markets and opportunities, but disrupting others.

Companies on the right side of these trends may be able to harness large and growing markets, while companies on the wrong side might find their business increasingly obsolete. This has been seen in the explosive growth of global technology companies in recent years, which are driving the growth in artificial intelligence, but also in some traditional businesses that have seen their business eroded by innovation.

Growth investors aim to align themselves with these trends. For example, the BlackRock Greater Europe Investment Trust portfolio incorporates trends such as the rising Asian consumer through its holdings in luxury goods companies, or the energy transition through its holdings in renewable power. Its largest holding is Novo Nordisk, which has been at the forefront of a new breed of weight loss drugs. These are important in helping people live healthier lives as they age and is part of the demographic trend. Its holding in semiconductor machinery maker ASML gives it a toehold in the fast-growing AI market, which is crucial for digitisation.

Emerging companies and markets

Growth investing may also bring in earlier-stage companies. Smaller companies can carry more risk, but their growth trajectory may be more exciting. They may be more nimble and dynamic, enabling them to adapt to different economic conditions, or exploit new markets. The BlackRock Smaller Companies Trust and BlackRock Throgmorton Trust aim to find fast growing small companies operating in structural growth sectors, with strong cash generation and capable management teams.

Growth options may also include investing in emerging markets. These are countries that are at an earlier stage of their economic development, but may be growing fast. These are inevitably higher risk investments, but using a diversified investment trust, such as the BlackRock Latin American Investment Trust, to access these markets can be a way to manage some of the risks.

Diversification: Diversification and asset allocation may not fully protect you from market risk.

Managing volatile markets

Growth investing can be more volatile. In particular, there can be risks around the valuation of high growth shares. This was seen most clearly during the technology bubble of 1999-2000, when loss-making companies saw their share prices inflated to ever-higher levels. Although some of these companies ultimately survived and thrived, a good company can be⁵ a bad investment if an investor pays too much for it.

Growth investments can be on high valuations, and still be mispriced by the market. Investors may underestimate the long-term growth of a company, for example, or the size of its potential markets. This often happens at times of significant change. For example, while there were plenty of casualties of the technology boom and bust, if anything, investors underestimated the impact of the internet and the growth trajectory for companies such as Amazon and Microsoft.

More recently, this has been seen with the energy transition theme: as the war in Ukraine sent energy prices soaring, investors grew very enthusiastic about the prospects for alternative energy, such as wind and solar. Share prices for companies rocketed. However, the companies were hit hard by inflation and interest rate rises, which raised development costs and share prices were hit hard. The long-term demand picture remains healthy for renewable energy companies, but the volatility has been painful.

As such, growth investing needs to be done in a risk-managed framework. Across the BlackRock investment trust range, our fund managers pay attention to the valuation of companies as well as the potential growth.

Reference to Specific Stocks: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.

Who does it work for?

Growth investing is a good option for people with a long time to invest. Growth investment can be a bumpier ride. It can take time for the likely trajectory of a theme to emerge, and the scale of the winners to become clear. Investors will have periods of over-exuberance on a particular theme, followed by periods of retrenchment.

Those with 10 or even 20 years to invest can ride out these ups and down. These may be people just starting out in investment, who may not need the capital for many years. It is also a good option for those that are comfortable with a higher risk approach to stock market investment, with the potential for higher rewards.

There are ways to mitigate the risks inherent in a growth investment. Saving smaller sums regularly means an investor will buy at a variety of different share prices. This reduces the risk that they are buying at the top of the market. Diversifying across a number of growth opportunities can also help manage volatility. A good active fund managers with strong analytical capabilities and a track record of identifying growth areas and the companies that can benefit from them, can help you harness growth opportunities in a risk-aware way.

For further information on investing for growth opportunities: https://www.blackrock.com/uk/solutions/investment-trusts/investing-for-income-and-growth

Manager skill: There is no guarantee that a positive investment outcome will be achieved.