Kevin Murphy and Nick Kirrage’s Schroder Income fund has been upgraded to a Silver Rating by Morningstar analysts.
The latest review of the value-focused fund has seen its rating moved up to match the rating on the Schroder Recovery fund, run by the same fund duo.
Murphy and Kirrage have run Schroder Income together since 2010, focusing on companies they believe are undervalued by the market and which they believe will come back into favour and generate superior returns over the long-term. They assess factors such as a firm’s 10-year average earnings and the share price compared to its perceived fair value to whittle down their investment universe.
Morningstar analyst Robert Starkey says: “The contrarian investment philosophy is founded on the belief that markets are inefficient. These inefficiencies create pricing anomalies that can be exploited by having a detailed understanding of companies and their prospects.”
In a concentrated portfolio of just 36 stocks, current top holdings include commodities firms BP and Anglo American, and Standard Chartered and RBS in the financial sector. There is also an emphasis on dividends in the portfolio and the £1.1 billion fund yields around 2.5%. While the fund’s benchmark is the FTSE All Share, the managers do not follow it closely and can invest across the market cap spectrum into businesses with a market cap as low as £50 million.
Growth versus Value
Value investors have had a tough time in recent years as quality growth stocks have been in favour while global stock markets have enjoyed a record bull run. Indeed, Starkey points out that the fund’s style and the long-term outlook the managers take can mean its performance looks erratic on a calendar-year basis. For example, the fund was down 13.39% in 2015 but returned 30.15% in 2016. Similarly, in 2016 it ranked in the third percentile of its category but languished in the 94th percentile of the group the following year.
It has also underperformed its Morningstar category – UK Flex-Cap Equity – over most recent time periods. The fund has produced annualised returns of 3.27% over five years and 8.99% over 10 years, some 3.81 percentage points and 0.63 percentage points behind the category average respectively.
Starkey says: “Over the short-term, the fund has faced headwinds given the outperformance of growth-orientated stocks. These conditions have resulted in five-year returns slipping behind that of the benchmark.”
However, Starkey rates the managers’ consistent approach and says the fund is one of Morningstar’s higher-conviction picks among UK value funds. Rated “above average” for both its people and process, the fund has been upgraded from a Bronze to Silver Morningstar Analyst rating for its clean share class.
Under the revamped Morningstar analyst rating methodology, different share classes of the same fund can receive different ratings depending on their fee. In this case, the more expensive share classes, which have an ongoing charge of 1.66% compared to the clean share class’s 0.91%, have retained their Bronze rating.
