Only four UK value funds achieved above-average returns during the two big value outperformances since the turn of the millennium, according to data from FE Analytics.
A number of commentators recently told FE Trustnet that they expect value and recovery stocks to start outperforming their high-quality peers soon, after a number of years spent lagging behind.
In an article published yesterday, Orbis’ Dan Brocklebank explained that as dividend-paying stalwarts or ‘bond proxies’ continue to creep up in price, the valuation gap between growth and value is increasing.
According to his research, industry “laggards” are highly likely to outperform market “leaders” when their aggregate valuation becomes historically cheap, as he says it is now.
“When the laggards have gone onto underperform when they’ve been relatively expensive. When they’ve been cheap they’ve gone onto outperform,” he pointed out.
“There is a broad correlation so we’re pretty excited about the number of opportunities and the biggest portion of that really comes from avoiding stocks that are popular at the moment.”
Given this view, we have looked at the two prolonged periods since the turn of the millennium when the MSCI United Kingdom Value index outperformed the MSCI United Kingdom Growth index. These took place between April 2002 and June 2005 and July 2010 and June 2013. 
From here, we selected the funds within the IA UK All Companies sector with a value mandate that managed to achieve top or second-quartile returns over both of these time frames. It must be noted, however, that past performance is no guide to future returns and that we’re simply taking a look back at the value funds that outperformed previous.
Our data shows that the fund with the strongest performance during both periods we looked at is the £834.4m Schroder Recovery fund, which has been headed up by Kevin Murphy (pictured) and Nick Kirrage over the last decade.
Between 30 June 2010 and 30 June 2013, it achieved a top-quartile return of 64.67 per cent compared to the FTSE All Share’s return of 43.52 per cent and its sector average’s return of 45 per cent.
Performance of fund vs sector and benchmark 30 June 2010 - 30 June 2013
Source: FE Analytics
Between the end of March 2002 and the end of June 2005 - when it was headed up by Ben Whitmore – it returned 43.44 per cent, almost tripling the return of both the FTSE All Share and its average peer.
While it is in the top quartile over one, five and 10 years, it is in the third quartile over the last three due to losing 12.74 per cent last year while its sector average returned 4.86 per cent.
It has retained a top-quartile spot over the last 12 months though as it has more than doubled its average peer year-to-date.
Kirrage and Murphy focus on companies that have undergone periods of underperformance and have been written off by markets as unable to recover. They look for stocks trading on low valuations compared to their long-term historical averages due to structural or insolvency issues.
Examples of the fund’s largest holdings include HSBC, BP and Royal Bank of Scotland.
Given its deep value mandate, investors may not be surprised to find the fund is in the bottom quartile for its annualised volatility and maximum drawdown (which measures most potential money lost if bought and sold at the worst times) over three, five and 10 years.
Schroder Recovery has a clean ongoing charges figure (OCF) of 0.91 per cent.
BlackRock UK Special Situations was managed by James MacMillan over the first value rally since 2000, when it returned a top-quartile 22.94 per cent. This was an outperformance of its sector average and the FTSE All Share of 11.51 and 11.37 percentage points respectively.
Performance of fund vs sector and index 31 March 2002 – 30 June 2005
Source: FE Analytics
During the second value rally it was headed up by Richard Plackett, when it beat its average peer by 15.03 percentage points and the UK multi-cap index by 16.51 percentage points with a 60.03 per cent return.
Now managed by Roland Arnold and Luke Chappell, the £735m fund invests in companies less than £1bn in size at time of purchase which also have above-average growth prospects.
Its portfolio is relatively concentrated and will hold between 50 and 60 stocks at any one time – examples of these include Royal Dutch Shell, RELX and British American Tobacco.
Given its focus on special situation stocks and the fact it will buy and hold specialist small-caps, the fund has a third quartile annualised volatility over three and five years. That said, it has a second-quartile maximum drawdown over both of these time periods. This could be because the managers barbell the fund’s small-cap exposure with tactical large-cap plays.
BlackRock UK Special Situations has a clean OCF of 0.92 per cent.
The third fund on the list is Alastair Mundy’s Investec UK Special Situations fund, which he has run since 2002. It has comfortably outperformed its sector average and benchmark over this time frame.
Over the first value rally since the millennium, it more than doubled the returns of benchmark and average peer with a total return of 25.45 per cent. Over the second rally, it outperformed each by more than 10 percentage points with a total return of 55.23 per cent.
Performance of fund vs sector and benchmark 30 June 2010 - 30 June 2013
Source: FE Analytics
Mundy is renowned for being a deep value and contrarian investor. He believes one of most predictable traits of the market is that investors will overreact to bad news, which is what he aims to capitalise on. Examples of his largest holdings include GlaxoSmithKline, HSBC and Royal Dutch Shell.
These companies are selected with the belief they can achieve an upside of at least 50 per cent. The team is sceptical of market commentary and therefore conducts its own research without becoming distracted by potential noise.
The fund has a third-quartile maximum drawdown over three and five years and is in the bottom quartile for its Sharpe return over three. Over a longer 10-year time span, however, it is in the top quartile for its maximum drawdown and has an above-average Sharpe ratio.
Investec UK Special Situations has a clean OCF of 0.85 per cent.
The final UK value fund to achieve an above-average return over both periods of growth underperformance is Artemis UK Special Situations. It has been headed up by FE Alpha Manager Derek Stuart since 2000, who was then joined by co-manager Andy Gray in 2014.
Over the first value rally since the turn of the millennium, it returned 44.94 per cent compared to the FTSE All Share’s return of 11.57 per cent and its sector average’s return of 11.43 per cent.
Performance of fund vs sector and benchmark 31 March 2002 – 30 June 2005
Source: FE Analytics
Over the second rally, it returned 50.01 per cent, outperforming its benchmark and sector average by 5.01 and 6.49 percentage points respectively and landing a place in the second quartile.
The fund is also in the second quartile for its total returns over one, three, five and 10 years and has avoided the bottom quartile on in every year over the last decade.
Stewart selects his stocks without referencing his benchmark and aims to find simple, cash generative businesses. These also tend to be out-of-favour due to a specific event that has negatively impacted the company.
The manager can only hold up to 5 per cent in each stock and the portfolio will consist of between 60 and 80 holdings at any one time. He also tends to hold between 40 and 50 per cent in both mid and large-caps and will hold between 10 and 15 per cent in smaller companies.
Artemis UK Special Situations has a clean OCF of 0.81 per cent.