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September 2013 | For professional advisers only. This material is not suitable for retail clients
Schroder Value InvestingSchroder Recovery Fund
September 2013
Nick Kirrage - Fund ManagerKevin Murphy - Fund Manager
The Value Perspectivewww.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
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
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 basicsLearning from history
%
Source: Societe Generale, as at 31/12/09Based on U.S Equity market – since 1880
3Schroder Recovery Investing | September 2013
0
2
4
6
8
10
12
14
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5-10 10-15 15-20 20-25 25-30 30
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 sellSource: 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 & beverageChemicalsTechnology
MediaIndustrialsFinancial svcsTobacco
HomebuildersInsuranceOil & gasBasic resources
General retailTelecomsHealth careUtilitiesReal estateTravel & leisureFood retail
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 easySource: Schroders
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 investmentsSource: Schroders, Thomson Datastream, share prices calculated from 3 March 2009 to 13 August 2013
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 marketSource: Schroders, August 2013
A long-term investment horizonIs 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%
A long-term investment horizonIs 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%
The power of a long-term recovery approachThe 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%
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)
Schroder Recovery Fund positioningA benchmark unconstrained product
12Schroder Recovery Investing | September 2013
For illustrative purposes only and not a recommendation to buy or sell sharesSource: Schroders, FactSet, as at 31 July 2013, *Includes overseas holdings (total overseas holdings 14.7%)
FTSE All-Share Schroder Recovery FundSector exposure Sector exposure
Top 20 holdings inSchroder Recovery Fund
Portfolio weight %
AstraZeneca 5.0Royal Bank of Scotland 3.9Hewlett-Packard 3.8Dixons Retail 3.7Rentokil Initial 3.6Barclays 3.3Lloyds Banking Group 3.2GlaxoSmithKline 3.2Resolution 3.1Vodafone 3.0Legal & General 2.9Tullett Prebon 2.8Darty 2.7Home Retail Group 2.7Apollo 2.7Henry Boot 2.2St. Ives 2.2Johnson Service Group 2.1Inchcape 2.1Dell 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%
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 growerSource: Schroders
Appendix
Source: Morningstar, bid to bid, net income reinvested, as at 31 July 2013, based on A Inc UnitsSource for ratings: Morningstar OBSR and Rayner Spencer Mills as at 31 July 2013 *top decileSector: IMA UK All Companies
Schroder Recovery FundPerformance
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
Schroder Recovery FundPortfolio 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
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
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 FundFund details
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
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