Unearth value opportunities with R&M UK Recovery

While growth stocks have dominated globally in recent years, the past 18 months has left the door open for a resurgence within UK equities. This has been driven by global investors pulling out of UK assets due to concerns about economic uncertainty; leaving lots of opportunities for value stock-pickers.

One way to get exposure to this potential is via River and Mercantile UK Recovery Fund (GB00B614J053), managed by Hugh Sergeant. It invests in UK stocks that Mr Sergeant believes have reached a low point in their or the sector's life cycle and have a valuation to match, but the company also has the right structure and management in place to induce a turnaround in profitability and share price. 

The fund launched in the midst of the financial crisis when such opportunities were rife, as several companies and sectors reached low points. Since then, and despite value-focused investing being out of favour for the past five years, it has delivered excellent returns. Over 10 years the fund made 206.7 per cent, nearly double the return made by the FTSE All-Share Index. It also beats the index over three and five years, during which periods it is among the top-performing funds in the Investment Association UK All Companies sector.

River and Mercantile UK Recovery benefits from an experienced manager who has been at the helm since launch. Mr Sergeant has 30 years’ investment experience and has built a strong long-term track record. According to FE Trustnet data, over 10 years he has delivered a cumulative return of 197.7 per cent, compared with 122.1 per cent by a composite of his peer group. 

Mr Sergeant aims for companies with strong underlying business models but whose profits and share prices are depressed. They should be poised to recover profitability through self-help measures, new management, or economic or industry stabilisation. Companies should have the potential to double the share price in three to five years.

The fund uses an investment process called PVT (Potential, Valuation, Timing), which Mr Sergeant says filters the best potential stocks to deliver this return, at attractive valuations, and at the right time. With more than 200 holdings, the fund is highly diversified and Mr Sergeant slowly builds exposure when the PVT screen shows an opportunity and then slowly decreases when the valuation is met. This reduces the risk of being caught in a valuation trap or selling too early.

One area Mr Sergeant is currently finding opportunities in is banks, with financials the fund’s largest sector at 25 per cent. Top 10 holdings the fund holds in this area include HSBC (HSBA), Lloyds Banking (LLOY), Standard Chartered (STAN) and Barclays (BARC). Oil and gas is the fund’s second-largest sector with 16.9 per cent. The fund also has about a quarter of its portfolio in small cap and Alternative Investment Market (Aim) shares.

Investors should be wary as this does increase potential for volatility as small-caps can be higher risk. In addition, a worthy note is there is no guarantee value investing will outperform growth, particularly in the UK, where valuations have been driven low by a muddled economic outlook. Should the economy take a turn for the worse, current valuations could be justified.

However, the fund has performed well and weathered volatility. It has a good risk/reward profile, which suggests the manager is skilled at finding the right stocks. 

If you want to diversify your portfolio by adding in value-style funds, River and Mercantile UK Recovery Fund’s proven process, strong management and good results make it a contender. Buy. EA