A buying opportunity has opened up in the beleaguered Schroder Recovery fund, according to Darius McDermott, managing director of Chelsea Financial Services, who is looking to increase exposure to the long-term top performing portfolio that has tanked this year.
The ‘value’ part of the UK market, the stocks that are trading for less than their intrinsic worth, has tended to outperform ‘growth’, companies whose earnings are expected to grow over time, over the past 15 years, until recently.
As an FE Trustnet article earlier this week pointed out, value has been increasingly out of favour for UK equities since the recovery from 2014’s autumn market correction, as growth stocks have dominated.
Performance of indices over 2yrs
Source: FE Analytics
Managed by Kevin Murphy and Nick Kirrage for almost a decade, the £735m Schroder Recovery fund has a strong long term track record versus its peers but its performance in 2015 has been the worst in the 269-strong IA UK All Companies sector.
Since the beginning of the year it has lost 11.56 per cent, compared to a sector average return of 3.23 per cent and a small dip in the FTSE All Share of 0.87 per cent.
Performance of fund versus sector and index in 2015
Source: FE Analytics
Nor has it been a good way to play the recovery in UK stocks since the perilous falls of August’s Black Monday and the market weakness in months leading up to this. While several funds are up double digits since Black Monday, the portfolio is down 2.71 per cent, the third worst in the sector.
McDermott (pictured) says he is looking to add exposure to the portfolio believing value funds such as Schroder Recovery are typically “either first or bottom quartile” and as the fund has struggled it will offer a substantial period of upside relative to its peers over the medium term.
“After a period of underperformance that it is exactly the period to buy these sorts of managers. If you already own them, then stick with them and there is a strong argument to add to them, as hard as it is to do when they are having a difficult time.”
“Historically, this is exactly the right time to buy this fund. With markets depressed we want to buy a fund that has a big beta to the recovery on the market. Even though these types of funds can have lumpy performance these are long term holdings.”
“Also, it is quite hard to time them, I’d rather buy it now than when it has shot into the first quartile.”
FE Analytics shows that the Recovery fund has been a top quartile performer in the highly-competitive IA UK All Companies sector since the duo took charge in July 2006 with returns of 107.73 per cent, meaning it has beaten the FTSE All Share by almost 40 percentage points.
Performance of fund versus sector and index under Murphy & Kirrage
Source: FE Analytics
Our data also shows that in each of the years the fund has fallen into the fourth quartile such as 2005, 2007 and 2011 the following year has seen the fund shoot into top quartile. In the latter two years, this has been followed by three years of top quartile returns.
Kirrage and Murphy aim to find out-of-favour companies that are set for a reversal in fortune over time.
The portfolio is currently mostly weighted to financials (29.7 per cent) particularly banks which the two managers thinks represent one of the cheapest parts of the UK market. RBS, Barclays, HSBC and Aviva all sit in the fund’s top 10. Oil producer BP and supermarkets Tesco and Morrisons also feature.
According Kirrage, the fund could see further falls in the near term, however he argues that based on the long term history of the fund it is a good to buy value.
“Many investors are nervous about the world and, in particular, investing more money in equities at today’s levels. Investors could argue that it’s all very well investing in the recovery approach for relative outperformance over the next 5 years, but does that really matter if the market falls significantly?”
“Looking back over time it’s fair to say our approach typically does not do well towards the tail end of bull markets – investors could potentially argue that today’s under performance is consistent with that pattern and suggests a future equity market set back.”
He says it is these sorts of market environments where a value strategy is at its best, as it can exploit aggressive falls in firms share prices.
“Value has underperformed growth for the longest period on record and is currently trading at the widest discount to growth since the Dotcom bubble in 2000.”
“This is unusual, and history suggests that value should recover and outperform over time. Given the scale of value’s recent weakness the potential recovery could be significant.”
The fund has a clean ongoing charges figure of 0.91 per cent.
