The Schroder Recovery fund has lived up to its name in recent months, holding steady at a time when its rivals have fallen by the wayside.
Investors in the fund have been heartened by a return to the value style of investing – buying out of favour companies in the hope they can rebound.
Part of this has come from commodities, which have rallied for a variety of reasons. Indeed, in the past week global commodity prices had one of the biggest weekly rallies in five decades with the S&P GSCI index up 10.1% in the past five days. The oil price has also experienced a spike, hovering at around $110 for several days.
The main catalyst for this recent spike was Russia’s invasion of the Ukraine, the former being one of the world’s main suppliers of oil.
Even prior to this attack though oil and gas prices had been exacerbated by rising inflation, which has now reached 5.5% in the UK and has hit 7.9% in the US, the highest it has been since 1982.
But since Russia attacked the Ukraine 28 days ago, commodity prices have risen sharply, ultimately benefitting funds such as Schroder Recovery, which are exposed to these assets.
Classic value stocks such as oil giants Shell and BP feature in the funds top-10, with ‘basic materials’ making up nearly 22% of the fund’s total allocation.
Over one year the fund has ranked in the top quartile of the IA UK All Companies sector, partly due to this boost in commodities, but managers Kevin Murphy and Nick Kirrage, said much of the fund’;s outperformance came from its consumer discretionary and telecommunications holdings.
They said: “Over the past 12-months to the end of February the impact from the fund’s weighting in the energy sector relative to the FTSE All-Share has been 0%.”
The pair added that they consciously make their investments diverse to ensure that “the portfolio isn’t a one-dimensional bet on any one economic outcome – but a collection of businesses that are unloved or cheap for different reasons so that we have the best possible chance of delivering strong investment returns.”
Tom Sparke GDIM investment manager said that the fund’s “concise portfolio of undervalued names could well continue to outperform as commodity prices should remain strong and rising rates will benefit financial stocks,” with the fund also holding several banks in its top-10.
Sparke pointed out that the fund had a pre-established value bias, which had steered it towards these “typical value holdings” prior to the war breaking out.
It is not just in the short term that this has worked, however. Despite a decade where growth has outperformed value, the fund has held its own.
It ranks in the second quartile of the IA UK All Companies sector over five years and over 10 it has made 147.3%, beating its average peer (97.8%) and FTSE All Share benchmark (93.8%).
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Sparke said it has had an “excellent period” because its ingrained value style has come back into favour with markets, proving to be a “fruitful approach”.
Fundhouse’s managing director, Rory Maguire, seconded Sparke’s ‘Hold’ call partly based on its recent returns and the managing team’s commitment to their process.
He said that over the years equity markets have “backed large over small and expensive over cheap, which has been costly for this fund.
“But in the past year, the market is now selling those expensive names and buying the cheaper ones.”
He commended Murphy and Kirrage, for “sticking to their process, in spite of immense pressure and in the end their security selection was rewarded.”
Murphy and Kirrage are co-heads of Schroders’s value investment team, meaning that their investment bias is explicit and can be expected to “remain true to their approach” Maguire said.
Near-term, the Schroder Recovery fund appeared to be a popular choice with fund pickers, with all of them recommending existing investors stay put.
But several admitted that there were some better, broader investment options available, even from Schroders.
Although Maguire said he backed the fund for the long term, he admitted that he preferred the sister-offering, Schroder Global Recovery “because its investment opportunity set is wider”.
Ben Yearsley, co-founder of Fairview Investing, said that “there are other alternatives that might be better placed such as JOHCM UK Dynamic and Fidelity Special Situations, which I think are slightly more well-rounded funds that are just a recovery play.”
He recommended that investors ensure that they balance out the fund’s strong value bias with the other holdings in their portfolio.
“I’m a believer in having balanced portfolios – some growth, some value and a blend of management styles. Therefore, despite the excellent recent performance, I would continue to hold to ensure a balanced portfolio.”
He added that while it was a “tough fund to beat” in terms of being well-positioned for the near future.
Sparke added, however, that the fund’s style made it “considerably” more volatile than its average IA UK All Companies peer, while also noting that sustainable investors will be uncomfortable with some holdings. “So it may not be suitable for all investors,” he said.