Peter Brunt: Welcome to our Morningstar Manager check-up, where we will run through three of our rated funds that have recently undertaken a review and maintained their ratings.
First up is Silver-rated JOHCM UK Equity Income, which aims to provide investors with a growing dividend income stream in addition to capital gains. The strategy has been managed by Clive Beagles and James Lowen since launch in 2004. The two have proved highly adept and disciplined in applying their contrarian approach to equity-income investing that focuses on stocks with an above-market dividend yield and reasonable growth prospects. The managers' focus on valuations tends to see the fund exit areas of the market considered to be "en vogue" early and invest in those that are still considered out of favour.
As a result, the performance profile of the fund can experience periods of relative weakness. Importantly, over the long term, returns have been strong relative to the benchmark and peers, including on a risk-adjusted basis, with stock selection the main alpha driver. The strategy's success has seen it gather significant assets over the years, leading to its soft closure in 2015. The group has managed capacity well in the past, but this remains something that we continue to monitor closely.
Next up is Bronze-rated JPM Russia (JRS), which has been managed by Oleg Biryulyov since November 2007. London-based Biryulyov has spent more than 20 years covering Russian and emerging European stocks. He is supported by the group’s extensive resources, which include two managers and an analyst dedicated to EMEA, together with the wider emerging-markets and Asia Pacific team. The strategy is managed following a high conviction, concentrated, long-term strategy, with active position sizes driven by conviction.
The portfolio was unconstrained until late 2011, when the group introduced stock and sector constraints to reduce benchmark risk and curtail the fund’s volatility. Investors should be aware the fund’s performance profile can still be lumpy given the large stock and sector bets, as well as the manager’s willingness to invest in off-benchmark stocks and IPOs. Since the implementation of the portfolio constraints however, the fund’s volatility has been lower than the index and peers, and performance has been strong.
Finally, we return to the UK, and another management partnership. Fund managers Nick Kirrage and Kevin Murphy have managed Silver-rated Schroder Recovery since 2006, since when they have demonstrated a strong working relationship and shared a sound investment philosophy. Their process seeks to identify companies that are trading at significant discounts to their perceived fair values. It uses a variety of valuation screens to reduce the universe to a manageable number of stocks, upon which the managers undertake more detailed research to eliminate any false positives. The managers are not constrained by the FTSE All Share benchmark when constructing the relatively focused portfolio.
With investments driven by the best value opportunities, deviations at the sector and market-cap level can be sizable. This, combined with the managers' long-term outlook, can result in a performance profile that can look erratic on a calendar-year basis and is generally more volatile than the benchmark. For investors that can tolerate this extra volatility, the managers' resolute adherence to the strategy has seen them rewarded over the long term. Over time, Murphy and Kirrage’s workload has increased. They co-head the group's Global Value Equity team, which comprises six analyst/fund managers, and also manage the Schroder Income and Schroder Global Recovery funds. We note that there was some turnover within the team in 2016 and 2018, but we still consider it adequately resourced given the approach.
