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Schroder Recovery

IA Sector:
UK All Companies
Asset Manager:
Schroders
Asset Manager Website:
Asset Manager Factsheet:

A UK equity fund that is managed according to a disciplined value approach. The team looks for companies that have suffered a significant operational and/or share price setback but have the potential to recover over the long term. Within its sector, the fund features in our 'Value-Biased' category.


Opinion, Characteristics & Utility

Opinion

  • This Established fund is managed according to a deep value style, with an emphasis on identifying stocks that have endured significant challenges and are out-of-favour.
  • The fund managers are experienced at applying the process and have demonstrated their discipline at maintaining their approach, even in times of adversity.
  • At present, the fund is close to the managers’ assessment of full capacity for the UK strategy.  While is not soft-closed, the firm is not actively marketing the UK fund to ensure its size does not compromise the investment strategy.  If you are considering a new investment in this strategy, we recommend checking the fund's status with the firm.

Characteristics & Utility

  • The fund offers an unusually pure application of a long-term value and recovery investment approach. The fund is likely to be meaningfully exposed to underperforming areas of the market that the managers believe have significant scope for a re-rating.
  • Such positioning results in a highly differentiated performance outcome when compared to the index and most peers. Recovery investing can endure long periods of underperformance when either the individual stocks remain out-of-favour or the style struggles. The other side of the coin is that investors also enjoy periods of powerful positive performance as re-rating occurs.
  • Investors must therefore have a long investment time horizon and tolerance for significant fluctuations in performance.
  • The fund's characteristics mean many investors are likely to be more comfortable incorporating it as part of a blend of UK equity funds.

Risk Commentary

The fund's KIID Synthetic Risk and Reward Indicator (SRRI) is 6. This is a regulatory measurement that is, where possible, calculated from the volatility of its weekly performance over a five-year period. A score of 6 means the fund's historic volatility is between 15% and 25%.

The fund's risk characteristics are illustrative of its differentiated nature and the requirement for investors to be prepared for periods of shorter-term pain. Its five-year realised standard deviation is above UK equity benchmarks and its maximum drawdown has also been larger. It also exhibits a high tracking error. We believe these characteristics are a fair reflection of the profile investors should expect. Different share classes could have differing SRRI scores.

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Description

Investment Team

The fund is co-managed by Nick Kirrage and Andrew Lyddon, who joined Schroders in 2001 and 2005, respectively.  Mr Kirrage heads the Global Value team and has managed assets in the value style at Schroders since 2006.  Mr Lyddon has managed value portfolios at Schroders since 2010.  The Global Value team consists of several fund managers who run value and income-orientated portfolios across UK, European, global and emerging markets.  They benefit from Schroders’ extensive resources.

Investment Philosophy

Contrary to prevailing wisdom, the team believes that stock markets are inefficient because market participants do not always behave in a rational way, and often extrapolate short-term trends, both good and bad.  Furthermore, they believe that investors often underestimate the potential for mean reversion in earnings.  Therefore, the focus of their approach is the identification of mis-priced securities where they see the potential for a recovery in profits, however challenging the backdrop may appear.

Portfolio Construction & Risk Controls

The portfolio comprises 30-70 holdings from across the market-cap spectrum.  The maximum position size is 10% and up to 35% may be in a single industry sector.  Up to 10% may be held in cash.   The managers may invest up to 20% outside the UK stock market when they believe the relative opportunities to be attractive.  This may be achieved through individual stocks and/or via a position in the team’s Global Recovery strategy.

Investment Process

The approach is framed by the identification of stocks that appear cheap and, through additional research, the analysis of the degree to which they are trading substantially below their long-term value.  This is an innately contrarian style and leads the managers towards companies that have endured significant operational and/or industry headwinds and, consequently, are often unloved and out-of-favour.

The process starts with several quantitative screens designed to help identify potential candidates. Price relative to 10-year average earnings is a key screen, but they also look at other metrics, including enterprise value, net operating profit after tax and price/tangible assets.  The screens narrow the investable universe into a subset of undervalued companies that are candidates for proprietary research by the team.  They then construct a financial model for each company.  This is based on at least 10-years’ worth of company accounts to help them understand how a firm has performed through a full economic cycle. Their analysis of these companies focuses upon the nature of their business models, balance sheets and capital allocation decisions.  The balance sheet analysis is designed to ensure the business can survive further adversity, while the business model assessment helps the managers judge the factors that will drive a turnaround and understand the potential extent of any such improvement in profitability. The team can then complete the “7 Red Questions” checklist.  This checklist framework is designed to uncover value traps and address key investment risks in a disciplined and repeatable way.  The information and analysis gleaned from each of the questions feeds into the overall assessment of whether or not the risk/reward trade-off is attractive for a given company.


Key Fund Facts

Inception Date:

05 May 1970

Manager(s) (Since):

Nick Kirrage (Jul 06)
Andrew Lyddon (Nov 22)

Fund Domicile:

United Kingdom

Base Currency:

£ Sterling

Fund Benchmark:

FTSE All Share / MSCI UK Value

IA Sector:

UK All Companies

Formal documentation, including the fund prospectus and the KIID, should be sought directly from the asset manager.  For ease of reference, a link to the ASSET MANAGER WEBSITE can be found above, as well as a link to the ASSET MANAGER FACTSHEET.


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