Despite a challenging 2017, investors in Schroder Recovery should continue to hold the fund as a hedge to their more growth-orientated funds, according to market commentators.
The £1.1bn fund has been a top quartile performer in the IA UK All Companies sector over 10 years, producing a total return of 183.78 per cent.
This is despite the value style being out of favour for much of the past decade as investors have sought out higher risk, growth stocks in the low growth environment.
The low rate environment has also contributed to a challenging time for value strategies as income investors have been prepared to pay higher multiples creating fewer investment opportunities.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
While the combination of all these factors has meant the value style has struggled over the last decade, FE Alpha Managers Nick Kirrage and Kevin Murphy’s Schroder Recovery fund has outperformed.
Wellian Investment Solutions chief investment officer Richard Philbin said: “The fund is dogmatically managed by two experienced and excellent fund managers.
“They fish in parts of the pond which are being overlooked so being as it’s a fairly concentrated portfolio – circa 40 holdings – you only need a couple to come back in style and the shorter-term poor numbers will rapidly turn around.”
Currently the fund, which has a yield of 1.95 per cent and a clean ongoing charges figure (OCF) of 0.91 per cent, is heavily weighted to financials (32.3 per cent), consumer services (17.5 per cent) and miners (11.5 per cent).
The fund performed strongly in 2016 as the value trade came back, led by commodity-backed miners and oil stocks as well as financials such as banks where interest rates appeared to have bottomed out.
“Value stocks had a brief run in 2016, when miners, financials and supermarkets bounced back but it was short-lived and investors returned to paying up for defensive growth and quality,” Chelsea Financial Services managing director Darius McDermott said.
Indeed, last year the fund struggled, returning a bottom quartile 8.13 per cent to investors as the market moved back to the more traditional growth stocks that have dominated for much of the last decade.
Somewhat surprisingly, while growth companies continued their ascendancy over value globally, in the UK 2017 things weren’t as clear cut.
Andrew Johnston, portfolio manager at Square Mile Investment, said: “The FTSE World Value UK index actually outpaced the FTSE World Growth UK index, with the former especially gaining ground towards the end of the year.”
However, he added that the term ‘value’ is subjective and the picture is slightly more nuanced than this.
Some sectors that could be considered more value-biased, such as mining, led the market while others, including retail, lagged.
Performance indices in 2017
Source: FE Analytics
“Scale has also been an important factor, with smaller-sized companies outperforming their larger peers over the year, following the opposite situation in 2016 post the Brexit vote,” he said.
“Overall, we would say that growth has been in vogue largely because global growth, whilst benevolent, remains more muted and monetary policy conditions accommodating.”
Charles Stanley Direct pension and investment analyst Rob Morgan said that "the outperformance of growth seems to have coincided with the fall in bond yields".
He said: "Should yields rise I would not be surprised to see value stocks and value managers start to fare a lot better.
"Higher interest rates and inflation would likely be beneficial for financials - e.g. banks - and these tend to feature significantly in value indices and funds."
Chelsea’s McDermott said it is impossible to know when the value style will return to favour for a more prolonged period, but noted that when it does, the Schroder Recovery fund should do well.
“Compared with many of their value-peers, Nick and Kevin are still performing relatively well and we continue to support them,” he said.
Square Mile’s Johnston agreed, noting that while this is clearly not a strategy for the faint-hearted, one of the characteristics that stands it in good stead is that the managers clearly have a sound appreciation of the dangers that this type of investment can entail.
“Furthermore, they understand the importance of having a committed approach and closely adhering to the investment process,” he said.
“As such the managers truly invest with a style that the fund's name would suggest; bringing both the potential for outsized returns but also the accompanying elevated risk levels.”
Premier Asset Management multi-asset portfolio manager Simon Evan-Cook said he owns the Schroder Income fund rather than the Schroder Recovery fund, which is run by the same team under similar ‘value’ principles.
“From our perspective, the team have continued to invest in the way we’d expect them to, which is to pick companies that are financially healthy, but out of favour with markets and therefore attractively valued,” he explained.
“This style didn’t work last year and, indeed, hasn’t worked for several years now. However, we don’t think value investing is dead and, as we saw at the end of 2016, if this style does come back into favour, it can do so with a bang.
“So, we still think it’s worthwhile having a reasonable exposure to the Schroder value team within our portfolios, as at some point we expect the investing winds to change.”
The £2bn Schroder Income, fund fared a bit better than its Recovery sister fund in 2017, returning 9.33 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Sitting in the IA UK Equity Income sector it has been a top quartile performer over five and 10 years, returning 149.56 per cent over the last decade.
Last week, Chelsea Financial Services research director Juliet Schooling Latter noted the fund “has little correlation with other income funds, tending to avoid the big income producers in favour of more niche names, where both capital as well as income can grow significantly”.
Schroder Income has a yield of 3.09 per cent and an OCF of 0.91 per cent.