Murphy says: "We look for companies that have underperformed the market significantly, companies that have had a meaningful fall in earnings and companies when the valuation ratios look attractive. In addition we look for companies with strong balance sheets."
The investment process is known as '3D' – the fund managers believe that they are disciplined, dispassionate (not effected by recent news) and discriminating.
There can be no escaping the fact that the last six months have been ideal conditions for this fund. As share prices tumbled, the number of attractive options grew and the managers made a number of purchases. What has followed has been an extensive rally which has seen the fund's returns excel to the extent that it's six-month return is 14.61 per cent whilst the IMA UK All Companies sector has returned 1.73 per cent in the same period.
Performance of Schroder Recovery fund over 6-mths
Source: Financial Express Analytics
Murphy and Kirrage believe that their fund has a remit that sets them apart from the usual 'special situations' fund. Whilst special situations fund have a broad remit to invest in any area of the market regardless of valuation, the Schroder Recovery fund only invests in value stocks. "It is the purest form of value investing", according to Murphy.
The fund has an exceptionally good alpha rating of 6.53 showing that the managers are making good decisions when it comes to stock picking. The fund has had a historically low turnover, with each stock being held for an average of five years. This is a sharp contrast to the market average of one year. The fund managers argue that in holding onto stocks for the long-term they minimise fees, which otherwise would eat into the returns for the investor.
With all this good news investors may be left asking are there any reasons not to invest in this fund. The nature of the fund’s investment style means that it is not suitable for investors who are not willing to take on high levels of risk. The fund has an annualised volatility of 22.41 per cent compared with the sector average of 18.38 per cent. In addition, investors should note that this fund is not suitable for those with short-term investment goals.
Though this fund has performed well over the long-term, it struggles to beat other funds over the short-term when market conditions are good.