Nick Kirrage and Kevin Murphy, co-managers of the Schroder Recovery fund, tell Cherry Reynard why, if investing in a sector feels uncomfortable, they are probably doing something right.
It would be natural to assume that ‘recovery’ funds would have done well in a climate of recovering equity markets. However, this has only rarely been the case, with ‘deep value’ as a style still struggling to find favour. The Schroder Recovery fund has been the notable exception.
The fund’s handsome gains have been made in some ugly sectors. General retail has been the strongest contributor to performance over the past 12 months, including widely unloved names such as Dixons. Nick Kirrage, co-manager on the fund with Kevin Murphy, says: “Owning stocks in an environment where the consumer was under pressure – but valuations were low – has been very rewarding in the last 12 months.”
Banks have also been a significant contributor to performance, particularly Lloyds. Housebuilder Taylor Wimpey and outsourcing group Logica have also featured among the top-performers.
“ We still see the value in the fear ”
Making money in uncomfortable sectors is at the heart of the pair’s value-focused approach. For the managers, if investing in a sector feels uncomfortable, they are probably doing something right.
“If you had asked someone 12 months ago what the chances were that those stocks would be the best performers over the coming 12 months, they would probably have laughed you out of the room,” says Murphy.
The managers’ key selection criterion is valuation. Reduced to basics, the duo’s process is to buy companies when they are cheap and unloved, hold them through the business cycle and sell them when they become expensive.
Their skill comes in defining when a company is cheap. To do this, they build a picture of a company’s normalised earnings: if it looks cheap compared to normalised earnings, it is a candidate for investment.
In this way, the pair aim to capitalise on the tendency for investors to be swayed by market noise and fashion. Investors fall in and out of love with companies, exaggerating movements at each end. Kirrage believes this creates a ‘value premium’ they can exploit.
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