Buying stocks at the right price is an integral part of investing. Using metrics to find out whether a stock is cheap or expensive is a natural stage in the decision-making process. Investors who buy funds often skip passed this – assuming the manager has done the work – but knowing whether a fund has cheap or expensive stocks will help you pick the best portfolios.
One common way to figure out whether a company is expensive or cheap is to look at its price-to-earnings ratio (p/e). This handy number tells you how much you are paying for a company relative to its profits in the past 12 months.
A fund’s average p/e tells investors what kind of companies a manager is buying, helping you figure out what chance they have at making returns.
A “value” strategy – buying cheap stocks hoping they rebound – will have a p/e lower than the market average whereas “growth” investing – where you buy a stock because you believe it can increase its profits year-on-year – will carry a higher figure.
Telegraph Money reveals which British stock funds are taking the biggest bets on “cheap” and “expensive” stocks.
Funds investing in smaller British companies take the top spot on the growth list. Smaller firms can offer better prospects than larger peers but this with more chance of losing your money.
If you want to own the most expensive, but most likely to grow, British companies, this is the sector to be in.
According to Morningstar, a data firm, the £170m Baillie Gifford Smaller Companies fund is taking the biggest bet on growth stocks, with a p/e of 26. The British market as a whole has a p/e of just 18.5.
It owns large positions in fast fashion retailer Boohoo and pollster YouGov.
It is followed by the £1.3bn CFP SDL UK Buffettology fund which holds stocks like Games Workshop and the London Stock Exchange. It has an p/e of 25.
The ASI UK Smaller Companies fund has the same average p/e and is taking big bets on expensive companies. Similar to the other funds, it owns retailer Boohoo and Games Workshop.
Looking at funds that buy British stocks of all sizes, DIY investor favourite Nick Train’s £6.3bn Lindsell Train UK Equity fund is top of the charts with a p/e of 24.
This should come as no surprise to investors. Mr Train is known for taking large stakes in highly-valued companies, such as Hargreaves Lansdown, which trades on a p/e of 30 and the London Stock Exchange, with a p/e of 42.
However, he is beaten to the top spot by the Unicorn Outstanding British Companies fund. The £127m fund has a number of holdings in the medical sector, such as laboratory equipment group Abcam and pharmaceutical company Dechra Pharmaceuticals.