With just a couple of days to go before the summer transfer window closes for football clubs across England (my own beloved Chelsea excluded, of course), teams up and down the land are looking to find the right recruits for the new season
You tend to see clubs looking for all sorts of players to fit their structure and wage bill – it can be an expensive star who is guaranteed to deliver the goods, or the youngster with untapped potential.
There is also the bargain player who, despite having proven quality, has struggled for one reason or another at their current club and is available for a reasonable price.
The likes of Thierry Henry and Dennis Bergkamp come to mind: both struggled in the Italian league, before lighting up the Premier League.
Unfortunately they played for Arsenal. Everyone knew that both had undoubted quality and that a change of environment could easily rejuvenate their careers.
These value buys are just as relevant in the investment world. Make no mistake, with the exception of two short stints, value funds have struggled in the past decade – and with central banks choosing to abandon plans to tighten monetary policy, there have been doubts about whether value still works in the long-term.
I believe the strategy is still valid, and could rally strongly again – particularly as the gap between expensive and cheap stocks is the widest it has been for almost a decade.
But predicting a value rally is not easy. So it is always good to be prepared and have some exposure in a wider portfolio.
Especially because the majority of the upside of a value rally is usually felt in the early days.
This week’s best in class is the prime example of a fund with a proven track record when it comes to this style of investing.
The Schroder Recovery fund is a deep-value fund. It has been managed by Nick Kirrage and Kevin Murphy since 2006 and the pair head up a five-man team at the asset manager, running a series of funds, including a global recovery offering.
The team looks beyond short-term news flow, believing it to be the main driver of market sentiment, rather than a realistic assessment of a company’s fundamentals.
In order to exploit the behavioural biases in the market, Nick and Kevin will be contrarian and place significant emphasis on both absolute return and taking a long-term view.
The starting point of the investment process is a basic valuation screen to highlight potential candidates; the team then focuses on stocks that have underperformed the FTSE All Share index over three to five years.
The managers then assess the extent to which profit recovery is within the company's own control, or dependent upon external conditions.
They look extensively at company balance sheets to ensure companies have enough capital to see them through short and medium-term challenges.
Unlike most fund managers, Nick and Kevin are steadfast about not meeting company management teams. They believe the full story of a company can be found in the financial statements.
Over the past decade the fund has returned 189.3 per cent - still managing to outperform the sector average (154.1 per cent), despite the style headwind.
But if you look at 2016 – the last time value stocks outperformed – it returned 31.1 per cent in that calendar year alone, compared with a sector average of 10.8 per cent.
Nick says there is currently an apathy around the banking sector, despite being recently cheap and having the best levels of capital they have had for 40 years.
He says: “For the first time in a long time they are making a case for themselves by returning capital to investors – with dividend yields increasing. That is making them compelling for income investors but also other investors are being paid to wait given they are investing in a cheap stock with a low valuation.”
Financials, at 30.3 per cent is currently the largest individual sector exposure in the 42-stock portfolio.
Nick also believes there is still an attractive discount in the UK market for the fund to take advantage of “with attractive dividend yields and a cheap large-cap stocks”.
Investors need to understand this deep-value style does lead to periods of under-performance, and returns can be lumpy, but the managers' core discipline of buying cheap stocks has proved successful in the long-term.
Darius McDermott is managing director of FundCalibre
