Best in Class: Schroder Global Recovery
Are all the elements there for a prolonged value rally? That is the trillion-dollar question in markets at the moment.
The past six months have shown there is plenty of life left in value investing – but that does not necessarily warrant a rotation away from growth, particularly if inflation is likely to be modest. What it does do is reinforce the importance of having some value exposure in your portfolio.
“If I was to look at value rallies over the last four years, each one has got larger, more significant, savage and violent. It can be very swift and it makes me caution people who are waiting for it to start to happen before they invest – that’s because it’s incredibly hard to time and that is why, even for sceptics, value is the insurance policy you cannot be without.”*
That’s the view of this week’s Best in Class manager. Nick Kirrage runs the Schroder Global Recovery fund alongside Andrew Lyddon and Simon Adler.
All three are part of Schroder’s highly regarded value team, which also runs the UK Recovery and UK Income funds within its remit.
The numbers on this fund back up Kirrage's remark. In the past five years the fund has returned 65 per cent – but it has also returned 36 per cent in the past six months alone as value names led the way following the vaccine bounce in November 2020. It reminds us to ignore value at our own peril.
As with the full Schroder value suite, the process behind this fund is designed to be rigorous and repeatable.
Initially, idea generation comes solely from quantitative screens. These screens look for stocks whose share prices reflect low cyclically-adjusted profits, as well as being low relative to their assets.
The team spend the majority of their time pouring over company financial statements. They will want to know how the company makes money and what drives the profit.
This will help them determine what level of profitability the company should be achieving, which they can then compare to its position in the economic and industry cycle.
This completes the first half of the financial statement analysis, which concludes with a risk management process. This analysis aims to understand where money is being spent, and where the pressure points will be.
This involves an in-depth look at the company's financial position and debt levels, including the term structure and weighted average interest rate. The analysis aims to find out whether the company is a fundamentally good business or not, its financial strength and what the business is ultimately worth.
With this, they can determine what price they put on the business and see if it is over or undervalued by the market.
The team is incredibly disciplined with purchasing and will patiently wait for a price to fall to a level they find palatable.
The managers are steadfast about not meeting company management teams. They believe the full story of a company can be found in the financial statements and not what they hear from the directors. This helps them stay true to their value style.
The portfolio composition can vary, but it is usually very easy to predict. The fund will also have a greater mid-cap focus than the benchmark and will be subsequently underweight the large and mega-cap names. The fund currently has its largest position in financials (17.8 per cent) while Natwest Group (3 per cent) is the largest individual holding. The fund’s ongoing charge stands at 0.94 per cent.
Regardless of where the rally goes from here, the past few months have taught us that value as an investment style is very much alive and kicking.
Whether you are a big believer in the style – or simply looking to hedge your bets following a decade of growth – we feel this exceptional investment team is perfectly positioned to help you do both.
Darius McDermott is managing director of FundCalibre
