Schroder Recovery and Investec UK Special Situations offer investors largely similar opportunities, according to investment professionals, although variables such as risk appetite, number of managers and breadth of investment universe are differentiating factors.
This comes following 2016’s well-publicised market rotation from quality growth into value assets, which was spurred by the belief that fiscal expansion and QE tapering will bolster global growth.
Performance of indices over 1yr
Source: FE Analytics
While this trend has remained in place over the last few months, many believe the value rally is set to continue.
“Most of the value stocks that we have been holding, we still have in the portfolio because they’re so incredibly cheap. We think this is a multi-year event,” the manager said.
For those who agree and are looking for home market value exposure, there are a number of UK equity funds available.
One that has been on many industry professionals’ radars, however, is Schroder Recovery, which has featured in several of FE Trustnet’s ‘fund pick’ articles recently.
The £976m fund is headed up by FE Alpha Manager duo Nick Kirrage and Kevin Murphy, who aim – as the fund’s name suggests – to invest in companies that have suffered a drastic setback in price share or profitability.
It has a concentrated portfolio of 40 stocks and a significant overweight to financials, with the likes of HSBC, Barclays and Royal Bank of Scotland accounting for some of its largest individual holdings.
It is also five percentage points underweight oil & gas relative to its FTSE All Share benchmark at 6.9 per cent, with only BP from the sector making it onto the fund’s list of 10 largest holdings.
As such, the fund struggled to keep up with its benchmark in 2015 and lost 12.74 per cent through the course of the year. As financials fell back into favour during the second half of 2016, it finished last year in the top decile with a return of 31.11 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
A fund that bears several similarities is Alastair Mundy’s £1.1bn Investec UK Special Situations fund, which is also structured using a contrarian, deep value approach to stock selection.
The fund has a slightly higher number of individual holdings at 51 but, as with Schroder Recovery, has almost a 30 per cent weighting in financials with HSBC, Lloyds, Barclays and Royal Bank of Scotland all featuring in its list of top 10 holdings. It is also underweight oil & gas at 9.4 per cent of portfolio holdings, although this is a slightly greater exposure to the market area than Kirrage and Murphy’s fund.
In terms of performance, the fund also struggled in 2015 although it finished the year on a smaller loss of 1.19 per cent. While it outperformed its average peer and benchmark last year, its return was more muted than Schroder Recovery’s at 17.63 per cent.
Given this, which of these funds should investors choose if they’re looking to gain exposure to UK value stocks in their portfolios?
Ben Yearsley, co-founder and investment director of Wealth Club, says the composition of both funds is very similar. For instance, the Schroder fund’s top 10 holdings list accounts for 45 per cent of the portfolio and Investec’s top 10 accounts for 52 per cent of the overall fund.
He also points out that six of the top 10 largest holdings are the same across both portfolios and that even their annual management charges are the same at 0.75 per cent. Their clean ongoing charges figures are also similar, with Schroder Recovery charging 0.91 per cent and Investec UK Special Sits charging 0.84 per cent.
“If you look at the records of the two funds over a decade, and indeed since Murphy and Kirrage took over the Schroders fund in 2006, Schroder Recovery has comfortably outperformed Alastair Mundy’s Investec fund,” the investment director pointed out.
Performance of funds vs sector and benchmark over 10yrs
Source: FE Analytics
“However, interestingly the majority of the outperformance came between the start of 2012 and February 2014, during which time Schroders outperformed by almost 40 per cent – a very short period in the context of the overall 11 years when both sets of managers have been running their respective funds.
“Strip that two-year period out and there isn’t much to choose between them – that’s one of the problems of looking at stats to choose your funds – they don’t tell the whole story.”
When it comes to stock selection, he says Investec has a tougher filter as companies need to have fallen by at least 50 per cent from the seven-year peak from time of purchase to be considered for the portfolio. In contrast, the Schroders fund can invest in any stock that has had a major share price or profit fall.
Given that value opportunities are difficult to find in strongly rising markets – conditions we have had for the past eight years – he says Schroder’s less rigid approach may well have helped.
“There really isn’t too much to choose between the two – I have met both teams on numerous occasions over the years and have been impressed with both. Both can be classified as contrarian, value or both in style – both teams also run income style mandates too,” Yearsley continued.
“The slightly more flexible approach from Schroders probably tips the balance in their favour though. Both funds though should be bought and held for the long term to get most benefit – five to seven years is probably the ideal holding period.
“One final thought – I wonder whether having two lead managers with the Schroder fund has made it easier for them to get out and see clients and hence seeing their fund being recommended more.
“It doesn’t matter to me whether I see Kirrage or Murphy. But, with Investec, I want to see Alastair Mundy – which when there is only one makes it harder getting out and about.”
Rob Morgan, pensions and investments analyst at Charles Stanley Direct, says Mundy’s nervousness on valuations makes him more cautious as an investor compared to Murphy and Kirrage; can also be seen through his higher-than-usual cash levels and use of money market tools recently as well as his stricter screening process.
Not only does the fund currently have 4 per cent in cash and some exposure to short-dated gilts, he also has what Morgan describes as an “unorthodox” position in S&P 500 futures.
“It is yet to pay off as the American index continued to test new highs at the end of 2016,” he pointed out. “In contrast, Schroder Recovery has been more fully invested (as is typical) and has more fully reaped the rewards of share price recovery in areas such as financials, energy and supermarkets.
“I like both funds but have a slight preference for Investec. However, I would actually use Temple Bar IT which is run by the same team and with the same process - and gives the manager greater freedom to express his best contrarian ideas.”
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics