Benefit from UK value with Schroder Recovery

Jason Hollands, managing director at Tilney Group, adds: "At a time when there are few bargains to be found across global markets and central banks are shifting policy away from extremely low rates, it seems wise to become more sensitive to valuations." 

The UK market, meanwhile, is suffering from negative investor sentiment due to the economic uncertainty surrounding its withdrawal from the European Union, and offers a wide pool of potential value opportunities. So if you want to take advantage of these, and diversify your portfolio with a fund that follows a disciplined value investment approach, Schroder Recovery (GB00BDD2F190) could be a good choice.

This fund invests in companies where the share price or profitability have suffered a severe setback, at least 80 per cent of which are in the UK. It has been managed by seasoned value investors Kevin Murphy and Nick Kirrage since 2006. According to FE Trustnet, over 10 years Mr Murphy has delivered a cumulative total return of 183.2 per cent, compared with 95.6 per cent for a composite of his peer group. Over the same period, Mr Kirrage has returned 183.1 per cent, compared with 94.9 per cent for a composite of his peer group.

Schroder Recovery Fund, meanwhile, has beaten the FTSE All-Share index and the Investment Association (IA) UK All Companies sector average over one, three, five and 10 years. Over 10 years the fund returned 205.8 per cent** – around double the return of this index and sector.  

The fund currently has 37 holdings, so is fairly concentrated. Its managers use valuation screens to identify potential investments, focusing on stocks that have underperformed the FTSE All-Share index over three to five years. They assess the extent to which a company's recovery is within its own control or dependent on external factors, and scrutinise its balance sheet to ensure it has enough capital to see it through short and medium-term challenges.

Schroder Recovery's largest sector exposure is financials, which account for 31.7 per cent of its assets. This is overweight relative to the FTSE All-Share, of which financials account for 26.8 per cent. The fund's top 10 holdings include HSBC (HSBA), Barclays (BARC), Standard Chartered (STAN) and Royal Bank of Scotland (RBS).

But it is very underweight consumer goods, which account for just 0.1 per cent of its assets, compared with 13.9 per cent for the FTSE All-Share.

The fund's largest holding is a money market fund, Schroder SSF Sterling Liquidity Plus (LU0269940127). James Yardley, senior fund analyst at FundCalibre, thinks it is being used as a proxy for cash, so is likely to be a temporary measure while Mr Murphy and Mr Kirrage decide where to allocate money.

Although value-style investing can generate good returns, it incurs the risk of buying value traps – stocks that are cheap for a reason. And value-style investing may not do better than growth-style investing in the near future.

Schroder Recovery's concentrated portfolio of unloved stocks, meanwhile, means it tends to be more volatile over the short term. But its managers have made strong returns even during a period when value has been out of favour. This suggests they are successful at avoiding value traps and finding good opportunities. 

So, if you can invest for at least 10 years, Schroder Recovery's established investment process, experienced managers and allocation to potential UK value stocks mean it looks well placed to continue making strong long-term returns. Buy. EA

Schroder Recovery Fund (GB00BDD2F190)

Source: *Schroders as at 30/04/18

Performance**

Source: FE Analytics as at 08/06/18,**Performance shown is for a different share class than the newer one (GB00BDD2F190) mentioned in the text

Top 10 holdings as at 30/04/18 (%)

Source: Schroders

Sector breakdown as at 30/04/18 (%)

Source: Schroders