I’m generalising, but in 2022, most growth stocks tanked. There are several reasons for this, but perhaps chief among them is that the bull run of 2020/2021 was unsustainable.
In my portfolio, dividend shares are definitely better represented than growth stocks. And that meant I felt very little impact from the growth stock crash that wiped billions of growth-focus funds over the past 18 months.
In fact, even the best growth-focused investor lost money. Cathie Wood’s Ark portfolio has lost the vast majority of its value. According to data, her nine ETFs slumped to a value of $11.4bn in December, from a peak of $60.3bn in February 2021.
So as we enter a new year, should I be increasing my exposure to growth stocks?
Why did growth stocks crash?
These stocks surged in 2021 and were trading with multiples far in excess of revenue or earnings. Eventually, and predictably, there was a sell-off, prompted by a surge in treasury yields which hurt more expensive growth stocks.
While some stocks have continued to perform in 2022, the macroeconomic environment, characterised by soaring inflation, higher costs of borrowing and a recession forecasts, has remained challenging for most.
An important factor is interest rates. Higher borrowing costs increase the cost of growth. Firms with fewer debt obligations and plenty of cash could be poised to perform better than their cash-poor peers as we enter 2023.
Risk vs reward
In 2020, Wood was named best stock-picker of the year by Bloomberg News editor-in-chief emeritus Matthew A Winkler.
Wood’s disruptive investments soared in 2020 and the performance of her portfolios, named after the Ark of the Covenant, gained her notoriety.
However, the near-$50bn loss in over the past 18 months highlights the risks associated with this area of the market.
I prefer only a limited exposure to growth stocks. Especially in the current macroeconomic environment that appears very similar to the conditions in which we ended 2022.
However, I have recently added some growth-focused stocks to my portfolio. For example, I bought Sociedad Quimica y Minera de Chile and Li Auto. Both of these decisions were based on China’s decision to ditch Covid-19 regulations and reopen the country to international travel.
Chinese auto stocks have been challenged by the lockdowns and restrictions that put strain on the supply chain. But 2023 should be a better year. And despite a global economic downturn, I’m betting that demand for lithium — SQM’s main product — will continue to grow throughout the year.
To that end, I’ve also bought more shares in NIO, as well as Scottish Mortgage, which has dipped 50% over the past 12 months. I choose the latter as the fund managers have an impressive track record of picking the next big winner.
So I’m buying more growth stocks. But they still represent just a small proportion of my portfolio.
James Fox has positions in Nio, Li Auto, Scottish Mortgage Investment Trust, and Sociedad Quimica y Minera de Chile. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023