Yet Australian advisers face a dilemma, as stock markets worldwide are currently overpriced. As of 31 October, the US equity market’s price metric stands at 1.02, indicating a 2 per cent premium. These elevated pricing levels have only occurred 20 per cent of the time since 2012.
With the Trump election victory adding to this price surge, how can advisers navigate the valuation bubble while safeguarding client capital for steady, risk-adjusted portfolio growth?
Finding relief in a ‘GARP’ strategy
Against this backdrop, many investors are seeking a core investment approach that offers a reliable buffer against the anomalies of inflated market prices. The opportunity for financial professionals and advisers is to continue playing a vital role in guiding client portfolio allocations to balance consistent, risk-adjusted growth with capital preservation. Deploying a “GARP” strategy that identifies growth companies trading at “fair” prices may well be the right solution for these uncertain times.
A “growth at a reasonable price” (GARP) investment strategy combines both growth and valuation disciplines, offering advisers a means to mitigate market overvaluation risks while supporting clients’ needs for sustainable returns.
This approach can be particularly effective for more conservative investment cohorts focused on wealth preservation – such as retirees, Millennials saving for a mortgage, and traditionally more risk-averse groups, including many female investors.
A balance of growth and value investing
By identifying companies with competitive revenue and earnings growth at reasonable valuations, often reflected in lower price-to-earnings multiples, this balance of growth and value investing can mitigate the risks associated with overvalued companies vulnerable to valuation corrections. It can also allow investors to uncover opportunities in cyclical or defensive sectors that are often overlooked during periods of market exuberance.
International access and growth potential
Additionally, a GARP strategy can help expand the returns potential of investment portfolios when applied to international stocks. Why?
The Australian share market represents roughly 2 per cent of global markets – and in growth terms has lagged its overseas counterparts in recent years. US stocks, on the other hand, were the best place to hold your money in the last three decades. Around the world, different markets experience wide variations of share performance over distinct time periods, each driven by country-specific drivers such as economic growth, politics, and regulatory landscape.
Yet just 16 per cent of Australian investors held international shares in 2023, significantly limiting the growth prospects of domestic portfolios.
With a GARP strategy, advisers can help clients broaden their domestic equity bias and diversify their portfolio, through exposure to the valuable growth sectors that are also underrepresented in Australia.
A winning strategy
GARP has already revealed itself to be a winning strategy in 2024, in a year marked by market oscillations between value and growth driven by rate cuts. According to Jefferies analysts, GARP has outperformed the broader share market so far and over the long-term.
Financial advisers can leverage this strategy to help clients navigate complex markets, preserve capital and work towards consistent, long-term, and risk-adjusted portfolio growth.
Those looking to integrate GARP might focus on metrics including earnings growth, P/E ratios, and debt levels to ensure they are selecting high-quality, fairly valued stocks. Similarly, investment products such as the Global X S&P World ex Australia GARP ETF (recently achieving a Recommended rating from Lonsec) can offer this balanced approach in a single, research-backed investment solution.
By blending growth, value, and quality, a GARP strategy provides a resilient foundation for portfolios, enabling advisers to support clients across varied market conditions and work towards consistent, long-term growth. This adaptability makes GARP a valuable strategy for a range of diverse client investment goals.
Manny Damianakis is head of sales at Global X ETFs.
Very few advisers bother to look under the hood – if they did, they will realise that it is the fund managers who take the cream and leaves the crumbs for the rest.
We have the audacity to call ourselves “advisers”. Yeah, right.