The Case For Aggressive Growth: Why It Should Be A Part Of Every Investor’s Portfolio

History demonstrates that equities have provided the highest long-term returns among major asset classes. Equities also surpass other asset classes in their capacity to offset long-term inflation, especially considering that a large portion of equity returns comes from capital appreciation which is not taxable until realized.

More specifically, many studies demonstrate that the aggressive growth equity investment style has proven to be the most rewarding style over the long term.(1) Besides providing a long-term superiority of returns, the aggressive growth style can be viewed as one of the best hedges against inflation – which is an important consideration as we enter into what we believe will be a period of prolonged high inflation. A look back at the worst period of inflation in U.S. history demonstrates that the aggressive growth style was the only equities investment style to stay ahead of inflation. Between 1972 and 1980, the aggressive growth style returned 130% versus an advance of 95% for the Consumer Price Index (CPI).(2) See Golden Eagle Strategies’ paper: “The Aggressive Growth Advantage.”

While the performance data provides a clear and compelling rationale for investing in aggressive growth, investors sometimes opt for less volatile asset classes. While volatility-mitigating investments may be prudent when cash assets are needed, all portfolios would benefit from having a portion of assets invested in aggressive growth. Why? Because this asset class drives wealth creation over time, as volatility smooths out, and also preserves wealth during periods of high inflation.

A Broad View: Asset Class Comparison

Investors have many investment choices beyond traditional asset classes. When evaluating investment options, investors should consider a number of important criteria.

Risk Versus Return

In the chart to the right, we map asset classes based on risk and return similar to the Capital Asset Pricing Model (CAPM) which describes the relationship between systematic risk, expected return for assets, and cost of capital. Investors expect to be compensated for risk, the time value of money, and the cost of money. The higher the risk, the higher the reward.

For example, the T-Bill at the lowest risk profile has less than a 1% return rate. While it is true that aggressive growth stocks can be more volatile, the style has returned 31%, 23%, and 16% annually over the past 5, 10, and 15 years respectively.(1) For investors seeking superior returns with a longer investment time horizon, aggressive growth becomes ever more attractive on a risk-adjusted basis. When investing, however, there are additional considerations beyond returns and risk. Liquidity and ease of access are also key.

Liquidity Considerations

When considering products such as private equity, venture capital, real estate, and certain hedge funds, hold time must be factored in as they are either closed-ended funds with a long-term hold of up to 14 years or have 3-5 years terms with early withdrawal penalty fees. An illiquidity premium is an additional return expected for the additional risk of tying up capital in a less liquid asset. During periods of financial crisis, investors may need to liquidate high-performing investments to provide cash liquidity and hold onto what could be under-performing investments in their portfolios due to liquidity terms. Therefore, illiquid investments must provide excess performance relative to liquid investments to compensate for the illiquidity. Plus, vehicles in illiquid asset classes often struggle to deploy all their capital, creating the possibility of being underleveraged.

Ease of Access

Most investors seeking a broader set of quality investment products cannot access them due to high minimum investment requirements and the complexity of investments. Private equity and venture capital are broadly considered the most restrictive in terms of investors ability to access these types of investments. This is followed by hedge funds and real estate. For many hedge funds, the minimum investment could be $1 Million or higher which is out of reach for most investors. Additionally, they are often complex instruments and may require a higher level of due diligence. The most accessible asset class is direct public equity stocks or ETFs, however, accredited investors can access niche alternative equity strategies that can provide differentiated and tailored solutions for portfolio construction that outperform direct stock or index investing.

Asset Class Comparison

In summary, the following chart compares returns, risk, liquidity, and ease of access across each asset class.

When looking to maximize returns, the highest performing asset classes are stocks, private equity, and venture capital. Of these three, stocks are the easiest to access and most liquid. Within stocks, aggressive growth has produced the highest returns historically.(1) While the risk profile of aggressive growth stocks is slightly higher than stocks as a whole due to higher volatility, volatility is reduced when investing with a long-term time horizon (as illustrated in the risk versus return chart).

Asset Allocation And The Case For Equities Class Comparison

As you see above, every investment comes with different characteristics. Asset Allocation insulates portfolios from the volatility of a single investment through diversification. Even for very conservative investors who may be tempted to avoid stocks, some exposure to stocks can help maximize returns as well as offset inflation. Every investment portfolio should have some stocks/aggressive growth no matter their risk profile, age, or goals to provide a balanced portfolio that provides for growth or as an inflationary hedge. Below are three case studies of how investors use equities/stocks/aggressive growth in their portfolios.

Case 1: Endowment, driving returns for the portfolio

An example of return profiles across asset classes comes from the $53.2 billion Harvard University Endowment, which has one of the best endowment investment teams. In looking at Harvard’s asset allocation over the past two years, it becomes clear that public equities are a critical driver in wealth creation for the portfolio – generating double-digit returns each year. Private equity also generated significant returns; however, private equity deals can be difficult to source and are much less liquid than public equities. Compared to the average investor, Harvard has a significant advantage in sourcing deals given its brand recognition and the large investment team that they employ. Each year, hedge funds come in third on the list, but in both cases, returns for this class are notably lower than public and private equity.