Fiducia Wealth Management
Posted in Investing, Fund Manager Q&A on 11.12.19
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 We like to post a Fund Manager Q&A periodically, to give a little insight into the processes involved in investment management and throw some light on what concerns you may or may not have.

This month, we hear from Fund Managers Nick Kirrage and Kevin Murphy from Schroders Income 

Fiducia Wealth Management: Tell us a little about how the fund is managed?

Schroder Income Fund: The Global Value Team manages over £12bn of equity assets in a contrarian, low turnover and pure value style. (Source: Schroders assets as at 30 September 2019). Nick and Kevin use the team’s distinctive complete income strategy to achieve both income and capital growth for the Schroder Income Fund, seeking to derive income from two sources. In this way, the fund managers seek to protect clients’ capital, provide an income and grow the dividend simultaneously.

FWM: What are your views on Brexit and its implications to your fund and beyond that the UK investment landscape? 

SIF: Picking stocks is the foundation of the Global Value team’s investment approach, and they are committed and disciplined value investors. They do not take a view on macroeconomic trends or events, as they believe identifying mis-priced individual securities is a more repeatable skill than that required to forecast the complex interrelated variables in a macro-based strategy.

FWM: How far down the market cap do you go with the fund?

SIF: Schroder Income Fund has the freedom to invest in companies of all sizes. Smaller companies’ exposure is, however, very selective with less than 1% of the portfolio in FTSE Small Cap names over the last 3 years (Source: Factset, unaudited numbers to 31 October 2019).

FWM: What sectors do you currently follow and why?

SIF: Team members have the freedom to research the global universe. Each team member has previous specific sector expertise that they can bring to their analysis, but this does not guide their choice of companies to research. Having no ownership of ideas encourages creative and diverse thinking and fosters an environment to test and challenge each other’s investment ideas. The team focuses on those companies within the cheapest 20% of the equity market. Any sector skews result from the cheap valuations of those companies that merit further research.

FWM: In the context of the General Election what actions can you take to mitigate such a binary event? Does your process change to take this into account?

SIF: The Global Value team are committed and disciplined value investors, prepared to reject the consensus in order to reap rewards in the longer term. Their investment process results from an empirically proven belief that investing in undervalued companies leads to better returns over time. Therefore, as bottom-up value investors, no matter what is happening in markets, Nick and Kevin pursue a fundamental, evergreen value strategy. Irrespective of whether value is in or out-of-favour today, value investing has displayed a consistent pattern of mean reversion over almost 150 years. The road is seldom smooth, but history suggests that the resulting outperformance of the portfolio from today’s level should be significant on a 10-year view.

FWM: If the Brexit deal is finally agreed what effect does that have on UK-centric assets in the fund or is more about the effect of QE and monetary easing.

SIF: See Fund Manager Kevin Murphy’s article on Brexit:

FWM: Will you increase exposure to more domestically oriented assets such as mid-caps and how does that affect the diversification of the fund?

SIF: The Schroder Income Fund’s exposure to mid-sized companies has increased over the last year, with exposure to overseas companies reducing. This is as a result of where the most attractively valued investment opportunities lie.

FWM: Have you been investing in assets that the Woodford funds have been forced to sell?


FWM: What is the fund liquidity position in terms of being able to sell?

SIF: The fund is most exposed to larger companies, 71% in FTSE 100 with 14% in FTSE 250 (Source: Factset unaudited data as at 31 October 2019). Any overseas holdings are typically large companies with global reach. As at the end of October 2019, 82% of the Schroder Income Fund could be liquidated within 10 days.

FWM: Is the UK market as undervalued as investor positioning may suggest?

SIF: Given the level of returns achieved by those stocks perceived to have significantly more certainty about their future earnings and dividend pay-outs, this has left many other companies under-owned by investors.

In terms of the headwind for the ‘value’ style, the seeds of outperformance are sown in bear markets. While it hasn’t been a bear market for the stock market, it certainly has been a bear market for value. Looking at the long-term history of the portfolio, it has been the case that the best time to buy (and also worst time to sell) the Global Value team’ funds has been after sharp pullbacks in relative performance.

In the UK, the data shows that growth stocks trade at a significant premium to value stocks and in recent years the most expensive stocks have become even more expensive. The point being made here is that companies that are successful, and appear to have more certainty on future earnings, do not justify unbounded valuations. A good business can still be a dangerous investment – safety generally stems from the price you pay for the asset.

As bottom-up investors, the managers remain focussed on the valuation of individual businesses: a good business is not always the same as a good investment. By doing this analysis, the managers are looking to identify those businesses with strong balance sheets, limited levels of debt and a ‘margin of safety’ built into them.

Part of this analysis has led the managers to increase their exposure to UK-focussed business with a proportional reduction in overseas companies.

Fiducia Wealth Management
Posted in Investing, Fund Manager Q&A on 11.12.19

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