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Williams: Why I’m scooping up value funds

26 November 2015

Saunderson House’s Ben Williams is selling out of ‘quality’ UK funds and buying ‘value’ strategies.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

UK value funds such as Investec UK Special Situations and Schroder Recovery offer the most compelling medium term prospects for returns within the UK equity space, according to Ben Williams, investment manager at Saunderson House.

As several recent FE Trustnet articles have pointed out, investing in UK equity funds targeting value strategies has on the whole not been as rewarding as investing in quality-orientated growth strategies for about the past few years.

The reasons for this include appeal of dividend producing equities rising strongly as demand for income generation has ratcheting up, while many investors have preferred the relative ‘safety’ of stocks with reliable earnings and healthy balance sheets in the face of macroeconomic headwinds.

According to FE Analytics, value has underperformed both quality and growth in the UK stock market over the past two years or so with a particular divergence noticeable over past 12 months.

Performance of indices over 1yr


Source: FE Analytics

Relative to quality, both value and growth were losing ground at a similar pace to each other since October 2013 onwards but a substantial shift about a year ago as investors seemingly dumped value stocks to a greater extent than growth stocks.

Relative performance of indices since October 2013


Source: FE Analytics


This could have been due to a number of the macro concerns that gripped markets around this period including slowing global growth, the Ebola virus and rising instability in the Middle East as well as a focus on the expectation of rising US interest rates.

Williams says he expects this to change over the medium term (three to five years) with value orientated funds gaining the most ground.

However, he thinks in near term there could be some further pain.

 “Our recovery ‘style bucket’ is where we see the best value and have been switching from ‘quality’ companies with stable earnings streams and widely owned UK domestic names over the past few months into funds exposed to unloved, under-owned mega caps – oil & gas, basic materials, food retail and financials”

He says in particular three portfolios stand out that have had a tough 12 months or so, underperforming their sector and index and losing investors’ cash as the best way to access a shift in performance for value.

“It may not work out over the next three to six months but looking on a three to five year view buying into the likes of Schroder Recovery, JOHCM UK Dynamic and Investec UK Special Situations now should provide better, if slightly more volatile, returns than more ‘quality’-positioned funds,” he said.

Kevin Murphy and Nick Kirrage’s Schroder Recovery, Alastair Mundy’s Investec UK Special Situations and Alex Savvides JOHCM UK Dynamic funds have lost 10.37 per cent, 3.36 per cent and 0.65 per cent over the past 12 months while the FTSE All Share has been flat and the average fund IA UK All Companies sector [to which they all belong] has returned 3.61 per cent.

Performance of funds, sector and index over 1yr


Source: FE Analytics

Over longer term, all three portfolios are well regarded and have track records that beat both sector and benchmark.

Looking at the longest comparable period, when Savvides launched his portfolio in June 2008, the three funds have made significantly more than the FTSE All Share and the sector average, as shown in the chart below.


Performance of funds, sector and index since June 2008


Source: FE Analytics

This includes the downmarket conditions of the financial crisis era but they have also beaten sector and benchmark since the rally from the bottom of the index in March 2009.

However Mundy’s £1.2bn fund’s performance has been a bit more disappointing of late with Investec UK Special Situations down against the FTSE All Share over three years and only up marginally over five years.

The manager who has a value/contrarian strategy takes a very long term view when buying out of favour stocks and since 2002, when he took over the fund he is ahead of the index and sector.

Murphy and Nick Kirrage have managed the £735m Schroder Recovery fund for almost a decade, over which time they have one of the best track records of any funds in the sector despite being the worst performer in 2015.

Savvides has managed his 333.2m fund since its launch in June 2008. The FE Alpha Manager seeks out troubled firms where there is some progress in solving their problems. This has worked well over the longer term with the fund top quartile since launch.

In terms of charges, JOHCM UK Dynamic is the cheapest with a clean ongoing charges figure [OCF] of 0.74 per cent, but it also charges a performance fee. Investec UK Special Situations has a clean OCF of 0.85 per cent. Schroder Recovery has a clean OCF of 0.91 per cent. Neither have a performance fee.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.