September 2013 | For professional advisers only.
This material is not suitable for retail clients
Schroder
Value Investing...
The Value Perspective
www.thevalueperspective.co.uk
1
 The Value Perspective website is the definitive resource
on ‘value...
Recovery investing is the art of using bad headlines to make good investments
The Schroder Recovery approach
2
Exploiting ...
What you pay, not the growth you get, is the biggest driver of future returns
10 year annualised return by starting Graham...
We focus on areas that offer compelling value – the greatest driver of long-term
returns
UK sectors grouped by Graham and ...
Finding recovery opportunities is easy
5
Buying them isn’t…
 Several of the most profitable recovery investment ideas of ...
Micro not macro
6
Focus on the recovery opportunity in share prices NOT the economy
 UK consumer has been under huge pres...
Recovery opportunities still exist
7
Look for unloved sectors and undervalued stocks
 UK banking
– Capital levels are 4x ...
A long-term investment horizon
Is volatility risk?
8
 Which of these two funds would you rather invest in?
 An easy choi...
A long-term investment horizon
Is volatility risk?
9
 Fund A and Fund B are the SAME fund
 The shorter the investment ti...
The power of a long-term recovery approach
The Schroder Recovery Fund
10
 Over longer time periods, normal market volatil...
In times of stress we accept short-term volatility to deliver superior long-term
returns
Monthly relative performance and ...
Schroder Recovery Fund positioning
A benchmark unconstrained product
12Schroder Recovery Investing | September 2013
For il...
Summary
13
A recovery approach is a powerful driver of long-term performance
 Genuine recovery investing is volatile by i...
Appendix
Source: Morningstar, bid to bid, net income reinvested, as at 31 July 2013, based on A Inc Units
Source for ratings: Morni...
Schroder Recovery Fund
Portfolio activity in last 12 months
16Schroder Recovery Investing | September 2013
Source: Schrode...
The Schroder Global Recovery Fund
17
Widening the net
In October we will be launching a Global version of the Schroder Rec...
18Schroder Recovery Investing | September 2013
Unconstrained: 40-70 stocks, completely benchmark unaware, absolute return ...
An experienced fund management team
19
Kevin Murphy, CFA
 Specialist Value UK Equity fund manager with 12 years’ investme...
Important information
20Schroder Recovery Investing | September 2013
For professional advisers only. This material is not ...
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Sept 2013 citywire north recovery uk05652

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Sept 2013 citywire north recovery uk05652

  1. 1. September 2013 | For professional advisers only. This material is not suitable for retail clients Schroder Value Investing Schroder Recovery Fund September 2013 Nick Kirrage - Fund Manager Kevin Murphy - Fund Manager
  2. 2. The Value Perspective www.thevalueperspective.co.uk 1  The Value Perspective website is the definitive resource on ‘value investing’ in UK equities  Value investing is a proven, long-term approach which focuses on exploiting swings in stockmarket sentiment, targeting companies which are valued at less than their true worth and waiting for a correction  This site aims to share the thoughts, opinions and passions of three experts in this field, along with independent commentators, providing greater insight into this often poorly understood area of UK equity investing  Twitter: @Thevalueteam Schroder Recovery Investing | September 2013
  3. 3. Recovery investing is the art of using bad headlines to make good investments The Schroder Recovery approach 2 Exploiting human nature  Companies frequently fall on hard times and most have the potential for recovery  Investors frequently miss this and recovery investments can trade at astounding valuations Recovery investors need  A hard head and an open mind – being different can be bruising but very profitable  A focus on the micro whilst being conscious of (but not swayed by) the macro  A long-term investment horizon – easy to say, but increasingly hard to do, in today’s world Schroder Recovery Investing | September 2013
  4. 4. What you pay, not the growth you get, is the biggest driver of future returns 10 year annualised return by starting Graham & Dodd P/E Recovery investing basics Learning from history % Source: Societe Generale, as at 31/12/09 Based on U.S Equity market – since 1880 3Schroder Recovery Investing | September 2013 0 2 4 6 8 10 12 14 16 5-10 10-15 15-20 20-25 25-30 30
  5. 5. We focus on areas that offer compelling value – the greatest driver of long-term returns UK sectors grouped by Graham and Dodd P/E How to identify recovery opportunities 4 Valuation, valuation, valuation The sectors above are shown for illustrative purposes only and are not a recommendation to buy or sell Source: Schroders, as at 30 June 2013 % Schroder Recovery Investing | September 2013 0 2 4 6 8 10 12 14 16 5-10 10-15 15-20 20-25 25-30 30+ Banks Food & beverage Chemicals Technology Media Industrials Financial svcs Tobacco Homebuilders Insurance Oil & gas Basic resources General retail Telecoms Health care Utilities Real estate Travel & leisure Food retail
  6. 6. Finding recovery opportunities is easy 5 Buying them isn’t…  Several of the most profitable recovery investment ideas of the last 20 years had (seemingly) compelling reasons to ignore them – Utilities in 2003 “but where’s the growth?” – Tobacco in 1996 “don’t they kill their customers?” – House builders in 2009 “house prices won’t be going up any time soon” – Banks in 2009 “UK domestic consumer exposure with regulatory and political risk? Easy choice”  Risk exists in all investments. With Recovery investments they often hide opportunity  The price you pay is the biggest driver of the returns you make - yet it’s frequently the last thing investors discuss Schroder Recovery Investing | September 2013 The best investments are almost never sleep easy Source: Schroders
  7. 7. Micro not macro 6 Focus on the recovery opportunity in share prices NOT the economy  UK consumer has been under huge pressure… … but Next +326%, Sports Direct +967%, Debenhams +208%  Financial sector has been continually troubled… … but RBS +52%, Lloyds +234%, Barclays +248%  UK housing market has been weak for 4 years… … but Taylor Wimpey +700%, Persimmon +250%, Bovis +110% Schroder Recovery Investing | September 2013 Investors often let the macro backdrop blind them to attractive investments Source: Schroders, Thomson Datastream, share prices calculated from 3 March 2009 to 13 August 2013
  8. 8. Recovery opportunities still exist 7 Look for unloved sectors and undervalued stocks  UK banking – Capital levels are 4x where they were 6 years ago, yet Barclays and RBS still trade at discounts to their tangible assets? Are banks really such bad businesses?  UK domestic companies – Investors still trade many UK oriented companies at low valuations, in particular consumer businesses. Kier, Home Retail Group, Ladbrokes etc  Pharmaceuticals – No longer hated, but hardly loved. Astrazeneca trades at the same shareprice it had 12 years ago. Deep value hiding in plain sight? Schroder Recovery Investing | September 2013 Recovery opportunity continues to exist in the cheapest parts of the market Source: Schroders, August 2013
  9. 9. A long-term investment horizon Is volatility risk? 8  Which of these two funds would you rather invest in?  An easy choice? Schroder Recovery Investing | September 2013 Source: Schroders Fund relative performances versus FTSE All Share FUND A FUND B Q1 Q2 Q3 Q4 Annual 2012 (2.0%) (12.0%) 16.0% 2.0% 2.0% 2011 (19.0%) 9.9% 17.1% (2.2%) 2.0% 2010 2.0% 8.0% (5.0%) (2.5%) 2.0%
  10. 10. A long-term investment horizon Is volatility risk? 9  Fund A and Fund B are the SAME fund  The shorter the investment time horizon, the more likely you are to find volatility Schroder Recovery Investing | September 2013 Source: Schroders Relative performance versus FTSE All Share FUND A FUND B Q1 Q2 Q3 Q4 Annual 2012 (2.0%) (12.0%) 16.0% 2.0% 2.0% 2011 (19.0%) 9.9% 17.1% (2.2%) 2.0% 2010 2.0% 8.0% (5.0%) (2.5%) 2.0%
  11. 11. The power of a long-term recovery approach The Schroder Recovery Fund 10  Over longer time periods, normal market volatility is removed and skill is (hopefully) revealed  By sticking to the recovery approach, irrespective of short-term volatility, powerful long- term performance can be generated Schroder Recovery Investing | September 2013 Source: Schroders, Morningstar Direct, returns shown are the Schroder Recovery Fund A Inc relative to the FTSE All-Share (TR) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Min Max Average 1 year 20.3% 5.2% (3.3%) 3.9% (8.8%) 2.7% 19.1% 1.5% (10.7%) 21.7% (10.7%) 21.7% 5.2% 3 year p.a. 15.5% 11.4% 7.0% 2.0% (3.1%) (0.5%) 2.9% 6.5% 1.2% 2.6% (3.1%) 15.5% 4.5% 10 year p.a. 2.3% 3.0% 3.2% 3.5% 3.3% 6.4% 7.2% 6.5% 3.3% 4.0% 2.3% 7.2% 4.3%
  12. 12. In times of stress we accept short-term volatility to deliver superior long-term returns Monthly relative performance and cumulative outperformance for Schroder Recovery Fund vs. FTSE All-Share (TR) index Being different isn’t always in favour in the short-term 11 But volatility is dampened over time, leaving strong long-term returns Source: Thomson Datastream, bid to bid, NDR from 31 December 1999 to 31 July 2013, net of fees. Benchmark is the FTSE All Share total return index Cumulative outperformanceMonthly outperformance Schroder Recovery Investing | September 2013 -100% -50% 0% 50% 100% 150% 200% 250% -10% -5% 0% 5% 10% 15% 20% 25% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Monthly Relative Performance Cumulative outperformance (RHS)
  13. 13. Schroder Recovery Fund positioning A benchmark unconstrained product 12Schroder Recovery Investing | September 2013 For illustrative purposes only and not a recommendation to buy or sell shares Source: Schroders, FactSet, as at 31 July 2013, *Includes overseas holdings (total overseas holdings 14.7%) FTSE All-Share Schroder Recovery Fund Sector exposure Sector exposure Top 20 holdings in Schroder Recovery Fund Portfolio weight % AstraZeneca 5.0 Royal Bank of Scotland 3.9 Hewlett-Packard 3.8 Dixons Retail 3.7 Rentokil Initial 3.6 Barclays 3.3 Lloyds Banking Group 3.2 GlaxoSmithKline 3.2 Resolution 3.1 Vodafone 3.0 Legal & General 2.9 Tullett Prebon 2.8 Darty 2.7 Home Retail Group 2.7 Apollo 2.7 Henry Boot 2.2 St. Ives 2.2 Johnson Service Group 2.1 Inchcape 2.1 Dell 2.0 Basic materials, 7.6% Consumer goods, 13.9% Consumer services, 10.6% Financials, 23.9% Healthcare, 7.4% Industrials, 9.8% Oil & gas, 15.0% Technology, 1.5% Telecoms, 6.4% Utilities, 3.9% Basic materials, 0.0% Consumer goods, 1.7% Consumer services, 27.3% Financials, 27.0% Healthcare*, 10.7% Industrials*, 17.5% Oil & gas, 0.9% Technology*, 11.2% Telecoms*, 3.8% Utilities, 0.0%
  14. 14. Summary 13 A recovery approach is a powerful driver of long-term performance  Genuine recovery investing is volatile by its nature  Over longer time periods volatility is removed and the power of the approach is revealed  Despite increasing market levels, recovery opportunities continue to present themselves Schroder Recovery Investing | September 2013 The Schroder Recovery Fund – a long-term capital grower Source: Schroders
  15. 15. Appendix
  16. 16. Source: Morningstar, bid to bid, net income reinvested, as at 31 July 2013, based on A Inc Units Source for ratings: Morningstar OBSR and Rayner Spencer Mills as at 31 July 2013 *top decile Sector: IMA UK All Companies Schroder Recovery Fund Performance 15Schroder Recovery Investing | September 2013 YTD % 1 year % 3 years % 5 years % 7 years % 10 years % Schroder Recovery Fund 27.5 52.5 60.9 118.9 98.0 232.8 FTSE All-Share (TR) 15.9 24.3 43.4 53.1 50.0 142.8 Relative return +11.6 +28.2 +17.5 +65.8 +48.0 +90.0 Rank 12/275 5/275 32/262 8/242 15/222 8/181 Quartile 1* 1* 1 1* 1* 1* 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Schroder Recovery Fund 4.5 -13.0 41.2 18.0 18.8 20.6 -3.5 -27.2 49.2 16.0 -14.2 34.1 FTSE All-Share (TR) -13.3 -22.7 20.9 12.8 22.0 16.8 5.3 -29.9 30.1 14.5 -3.5 12.3 Relative return +17.8 +9.7 +20.3 +5.2 -3.2 +3.8 -8.8 +2.7 +19.1 +1.5 -10.7 +21.8
  17. 17. Schroder Recovery Fund Portfolio activity in last 12 months 16Schroder Recovery Investing | September 2013 Source: Schroders, 31 July 2012 to 31 July 2013. Stock names in orange indicate trading activity in the last 6 months New purchases Additions Reductions Complete sales Aviva Apollo Rentokil Bodycote Pfizer C&C SAIC AstraZeneca Resolution Deutsche Post Seagate Tech SDL Barclays Robert Walters Dixons Retail Taylor Wimpey BP RBS DS Smith William Hill Darty Tullet Prebon Eli Lilly Debenhams Wm Morrison Henry Boot Dell Legal & General Future Lloyds Banking Group Hewlett Packard Next ICAP Old Mutual
  18. 18. The Schroder Global Recovery Fund 17 Widening the net In October we will be launching a Global version of the Schroder Recovery Fund. This fund has several attractive attributes  Recovery investing thrives on exploiting extreme miss valuations – by broadening our horizons outside of the UK we can pick from an extremely deep opportunity set  We can also take advantage of opportunities which simply do not exist in the UK, for example the huge fall in global IT valuations, an industry with few UK listed stocks  Despite the obvious attractiveness of a global recovery approach, there is almost no one else doing this in the UK market Schroder Recovery Investing | September 2013 Global Recovery represents a compelling opportunity to expand our approach overseas
  19. 19. 18Schroder Recovery Investing | September 2013 Unconstrained: 40-70 stocks, completely benchmark unaware, absolute return focus Contrarian: A disciplined value driven approach. Contrarian calls and common sense Low turnover: A thoughtful, patient, investment style, targeting long-term value creation Bottom up: A focus on micro, not macro, leveraging our skills in company analysis The Schroder Global Recovery Fund Fund details
  20. 20. An experienced fund management team 19 Kevin Murphy, CFA  Specialist Value UK Equity fund manager with 12 years’ investment experience  Previously sector analyst for Pan European Construction and Building Materials  Investment career commenced in 2000 in Schroders’ UK Equity fund management team  Chartered Financial Analyst  Degree in Economics, Manchester University Schroder Recovery Investing | September 2013 Source: Schroders as at 30 June 2013 Nick Kirrage, CFA  Specialist Value UK Equity fund manager with 11 years’ investment experience  Previously sector analyst responsible for Transport, Metals & Mining sectors  Investment career commenced in 2001 in Schroders’ UK Equity fund management team  Chartered Financial Analyst  Degree in Aeronautical Engineering, Bristol University
  21. 21. Important information 20Schroder Recovery Investing | September 2013 For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. The opinions, beliefs expectations or intentions, unless otherwise stated, are those of Schroders. All information and opinions contained in this document/presentation have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in this document/presentation when taking individual investment and/or strategic decisions. Schroder Recovery Fund: Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies. Investments in smaller companies can be less liquid than investments in larger companies and price swings may therefore be greater than in larger company funds. The fund can use derivatives for investment purposes. These instruments can be more volatile than investment in equities or bonds. The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only. Issued in August 2013 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 2015527 England. Authorised and regulated by the Financial Conduct Authority. UK05652

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