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Investment research: Three-year track record

7 March 2019

In a new monthly Investment Research column for Professional Paraplanner, Juliet Schooling Latter, research director, FundCalibre, looks at funds that have just passed or are approaching their three-year track record.

I like a fund and its manager to have a decent track record before I’ll even consider highlighting a product to a client as a potential investment choice.

When I say ‘decent’ obviously the longer the better, as you can more clearly see how the fund behaves in different market environments and the manager can be truly tested. But a bare minimum would be three years. A three-year track record is the minimum time-scale required for a fund to be considered for an Elite Rating by FundCalibre, our fund ratings business.

In this column I will be taking a monthly look at funds coming of age: those that have just passed or are approaching the all-important three-year track record, when the fund research begins in earnest.

The first fund we’ll look at is the Schroder Global Recovery.

Launched on 30 October 2015, it is managed by two managers I already rate very highly: Nick Kirrage and Kevin Murphy. Nick and Kevin run the very successful Schroder Income and Schroder Recovery funds, and this is a global offering managed in the same deep-value style. With a larger universe from which to pick their ideas, they have enlisted the help of a third co-manager, Andrew Lyddon.

The timing of the launch hasn’t been helpful. Bar a brief spell following the Trump Tantrum in 2016, value has under-performed growth for some years now. But despite the style headwind, the fund has still managed to beat its peer group, returning 48.5%* while the IA Global sector average is 45.96%*.

Nick and Kevin have worked together for more than a decade and have spent years fine-tuning their process, which, like ours, starts with a quantitative screen. The screen isn’t intended to drive stock selection decisions, but rather help to prioritise their research and highlight value ideas: companies that have suffered a severe business or price setback.

The financial statements of each business are then put under the microscope, with the team looking at how the company makes money, what drives profits and if they are within the company’s own control or dependent on external conditions and, ultimately, whether it is a good business or not. The team also looks at where the company is spending money and where the pressure points may lie. To ensure a sufficient margin of safety, consideration is given to how well a company would weather further adverse developments, accepting that operating environments may often get worse before they get better. To give you an idea of the depth of their research, Nick reckons he spends half his day with his nose buried in company reports and accounts; an essential attribute for a value-driven approach.

Value-investing can be bruising but very profitable. By its very nature, some companies will disappoint and can ultimately go bust, so the skill of the fund manager in choosing the right stocks is very important. It can also take time for change to take place and the share price of a company may fall before it rises, so investors do need to have patience and a long-term investment horizon when considering a fund of this ilk.

While value-investing remains out of favour, we have been making sure that our investment portfolios are more style-neutral than they have been for some time – decreasing our growth exposure and adding to value.

For investors contemplating the same, this fund is now worth a more detailed review.

Fund Calibre Elite Rating

A three-year track record is the minimum time-scale required for a fund to be considered for an Elite Rating by FundCalibre, our fund ratings business.

The first stage of our process involves a proprietary screening tool, which strips out market movements to lay bare the value added (or not) by a fund manager and, importantly, their consistency. AlphaQuest (as it is called) needs at least this amount of data to give an accurate reading of any alpha generated, and to reveal if a fund manager has just been lucky or is actually skilled at picking stocks.

AlphaQuest then back-tests the data to give a probability of a fund manager being able to repeat that skill in the coming months. Only if a fund passes this screen will we take it on to stage two, a qualitative assessment.

Schroder Global Recovery fund from launch


*Source: FE Analytics, total returns in sterling, 30 October 2015 to 22 February 2019

Juliet’s views are her own and do not constitute financial advice.


Professional Paraplanner