Do interest rate increases require a change in investment strategy?

Buying shares when they seem cheap in the hope that it will be worth later may seem to be one of the fundamental principles of investment.

But this strategy, known as value investing, is not the only way to make money – and for many years it has certainly not been the most successful.

Since the financial crisis, fund managers have instead favored a growth strategy – the hunt for companies with sales, profits, margins or all those in rapid growth, regardless of cost, have outperformed.

Since the financial crisis, fund managers who have fostered a growth strategy have outperformed

Since the financial crisis, fund managers who have fostered a growth strategy have outperformed

Since the financial crisis, fund managers who have fostered a growth strategy have outperformed

Fund managers perceived as having a propensity to growth, such as Nick Train of Lindsell Train and Terry Smith of Fundsmith, have attracted savers with their stellar results.

For example, those who invested £ 1,000 in Train's Finsbury Growth & Income Trust in 2009 would have remained at over £ 5,000, while the UK's average equity income fund gained just under £ 3,000.

But it may be about to change. In the last two years, UK value shares – including HSBC, BP ​​and Vodafone, according to the MSCI UK Value Index – have started outperforming their growth peers.

For savers this could mean that it is time to diversify beyond fund managers who have achieved good results in the last decade simply because of their preference for a growth strategy.

If value investments are actually coming back in favor, managers who will excel in this new environment may be those whose performance has been rather poor in recent years.

Darius McDermott, managing director of the fund research firm Chelsea Financial Services, says it may be difficult for savers to distinguish between fund managers' strategies.

Anyone wishing to bet on valuable funds, which could have good results over the next few years, might look to Schroder Income, Investec Global Special Situations and Jupiter UK Special Situations, he says.

But why do stocks of value start to outperform their growth peers and remain that way? Niall O & # 39; Connor, Deputy Director of the Brooks Macdonald Defensive Capital Fund, believes that the real reason why value strategies are increasing goes straight to the heart of monetary policy.

UK value shares - including HSBC, BP ​​and Vodafone, according to the MSCI UK Value index - have started to outperform their growth peers.

UK value shares - including HSBC, BP ​​and Vodafone, according to the MSCI UK Value index - have started to outperform their growth peers.

UK value shares – including HSBC, BP ​​and Vodafone, according to the MSCI UK Value index – have started to outperform their growth peers.

"Since the financial crisis, we have had a great deal of quantitative easing," he says.

This is where central banks, like the Bank of England, release more money in the economy by buying "safe" assets like investor government bonds again.

This has the effect of pushing investors to riskier assets such as equities and, more particularly, growing companies.

Companies can afford to burn money to increase their size when interest rates are low and they can borrow easily, and investors reap the rewards for a chance on these upcoming companies.

Or Connor says, "You have electric scooter companies that are supposed to be worth billions of dollars, and all they are doing is supplying electric scooters and providing an app.

"It's a great concept, but I do not see the value in them," he warns. "Tesla is more valuable than General Motors and Ford, but the products could be good but the ratings are crazy."

Think that the gold times for these types of companies could be towards the end.

Now that quantitative easing has come to an end and interest rates have started to rise, it is worth keeping cash in the bank, he says.

Investors no longer need to rush to risky companies to make money, which means that prices of growing companies should start to fall.

Or Connor explains: "I no longer need to invest in things like Tesla to get a return, why should I take this risk when I can get risk free money?"

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