Value isn’t just banks, miners, energy stocks and financials like the majority of people think, according to Schroders fund manager Simon Adler, who said there’s now a wider range of value opportunities outside the traditional go-tos. 
Adler, manager of the £995m Schroder Global Recovery fund, said the portfolio is more diversified today than it’s ever been in the past with regards to the variety of sectors and types of companies it holds.
“What's interesting today is that people perceive value to be banks and miners and energy stocks. And there's no doubt we have exposure to banks and indeed we share the view that banks and energy are very attractive [assets],” he said.
“But we are actually are finding value in all kinds of other areas and the portfolio is really quite diversified versus where we’ve been in the past.”
Schroder Global Recovery still holds some of these ‘classic’ value assets, with just under half the portfolio invested in basic materials, financials, utilities and industrials combined. But it is focusing on a wider set of value opportunities.
“We see huge attractions in Japan. We think there's a number of very, very attractive businesses there that have fantastic balance sheets, very low valuations, manage stakeholders in a very sustainable way,” Adler (pictured) said.
“We think there's a lot of pretty high-quality businesses that people are overlooking.”
One of these companies is Japanese gaming company DeNA, which Adler believes is a “remarkable business”. The company has significant holding in Nintendo, which when combined with the net cash on the balance sheet makes up a very significant portion of the market cap of the business, according to Adler.
“What's more remarkable DeNA is that last year, they bought back in excess of 10 per cent of their shares outstanding. And they're in the process of buying back another 8 per cent of their shares outstanding today,” Adler explained.
“That's a Japanese business that we think is very cheap, that has a very good balance sheet and is acting to improve its valuation in terms of using it to cash to buy back shares.
“Things are happening in Japan and we say no to a huge number of the stock opportunities in Japan. But a number of the ones that we have looked at, we think are very attractive and that's an example of one.”
This is one example of the different types of companies the Schroder Global Recovery invests in, which all fall into ‘buckets’.
This is the end result of the fund’s four-part investment process. First is screening for “the most attractive of the cheapest shares in the world”, which is typically about 20 per cent of all stocks available.
The second part is the analysis, building the model and answering questions such as if there are structural threats to the business. This rules out about 95 per cent of the companies that passed the initial screening. Third is assessing the risk versus reward of the stock.
The fourth element of the process is ‘value archiving’ – essentially a five-year review where the teams goes back over their past decisions to see what went right or wrong and identify any lessons that should be learned from this.
“[The process] does two things. It only looks at the cheapest shares and so only looks at genuine value. It has a very disciplined, forensic, detailed process to strip out all the stocks that we think are traps and effectively end up with what we hope is the most attractive portfolio of about 50 of the cheapest companies in the world,” Adler explained.
One of the ‘buckets’ Schroder Global Recovery holds is ‘unloved quality’, or “high quality businesses that for whatever reason aren’t loved today”, Adler explained. GlaxoSmithKline and Bristol Myers Squibb, both pharmaceutical companies, are examples.
“They are very, very good businesses that for whatever reason at the moment the sun isn't shining on them. But when we believe you're buying high quality businesses, a very attractive valuation,” Adler said.
One of the challenges facing these companies at the moment and contributing to their unpopularity is various patent cliff type worries, an issue in drug development companies.
“But they've thrown billions of dollars at fixing that. And we're confident that they will come up with new drugs as all the other pharma companies that have ever faced a patent cliff have succeeded to do,” the manager said.
Other stock examples are Molson Coors and Rolls Royce, focusing more on the consumer side, and have both had massive set backs due to Covid-19.
Molson Coors, a drinks firm, is dealing with the ongoing headwind of lockdowns and partially closed hospitality, particular in Europe. Rolls Royce has seen its main hit come from the airline and travel industry shut down, impacting the plane engine side of the business.
“[But] the pandemic will pass, and we will learn how to deal with that [and] at that stage the quality will come into the sun, we're very patient investors,” Adler said. “They're examples of a number of others of high-quality businesses that are in the portfolio that have got very temporary issues.”
The remaining buckets of stocks are ‘tortoise’ and ‘turnarounds’ both of which have opportunities outside of the classic value sectors.
Another bucket is ‘tortoise stocks’, or companies that “are not going to shoot the lights out, but which we believe that over time can manage to create value”. Adler said. Examples would be UK supermarkets Tesco and Morrisons.
“Companies slowly improving, growing their top line, improving their margins that have been operating for all their stakeholders and returning cash to shareholders as well, we think that's an attractive combination,” Adler said.
Finally is the ‘turnaround’ stocks, which play a large part in the Schroders Global Recovery fund.
These are companies that for some individual or sector-based reason have got into trouble but the managers feels the prospects for a turnaround are reasonable and the valuation more than compensates to take on that opportunity.
“We’ve got all types of names here - Royal Mail still turning around. They have done very, very well but that's turned around,” he said.
“So yes, we think value is very attractive. But value isn't just financials and energy. There's value in Japan, there's value in unloved quality, there's value in tortoise type stocks, value in all kinds of turnarounds, in all kinds of countries and sectors.
“We think the value that we're able to find today is broader than perhaps what some people might imagine,” he concluded.
Adler manages the Schroder Global Recovery fund along with Andrew Lyddon and Nick Kirrage, who are all part of the Schroders Value Investment Team.
Over the past five years, the fund has underperformed both the MSCI World and IA Global sector with a total return of 69.86 per cent. Although this has been a period when value has been out of favour and growth has dominated.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, over 2021 so far – which has been a more favourable for value – the fund has returned a top-decile 19.51 per cent. This compares with 7.37 per cent from its average peer and 8.58 per cent from the benchmark.
The fund has an ongoing charges figure (OCF) of 0.93 per cent.