Interactive Investor has dumped Schroders duo Kevin Murphy and Nick Kirrage from its buy list over stock selection issues and concerns over outflows.
The £1.3bn Schroder Income fund had lost investors 35% in the year to October, putting it at the foot of the performance table against its peers in the Morningstar UK Equity Income category, II said in a press release.
The fund has been on the II Super 60 since the buy list launched in January 2019.
Over five years, the fund has lost investors 6.7% compared to gains of 8.9% in the FTSE All Share. The value fund’s objective is to outperform the index over periods of three to five years.
II head of funds research Dzmitry Lipski said his team had been closely monitoring the fund’s performance and positioning over the past six months, but that its return profile deteriorated further.
“It has been acknowledged that the appetite for cheaper stocks has decreased significantly over recent years, which had a big impact on the performance of value strategies against the broader market.
“However, while we may tolerate funds that underperform due to prevailing market environment, we are unable to endorse a strategy that has not been able to deliver due to stock selection.”
II wouldn’t name specific stocks it was concerned about because its analysis was based on confidential information from Schroders. Instead, it told Portfolio Adviser it looked at attribution numbers over multiple time frames and couldn’t find evidence that stock selection added value.
The II buy list still includes value funds among its constituents, including Man GLG UK Income and River and Mercantile UK Recovery, plus Murray International on the investment trust side.
Lipski also expressed concerns about outflows from the fund. “While there are still no signs that we should be worried, if the trend is ongoing it would be more prudent to remove the fund now.”
The fund started 2020 with £2.4bn but investors have pulled £415.1m from the fund in the year to October, according to Morningstar figures. That compares to total net inflows of £64.4m in 2019 and £109.1m in 2018.
Yield was another concern. Currently, Schroder Income has one of the highest historic yields in the sector at 6.46%.
“This has been mainly due to investing in overlooked businesses that are willing to pay higher dividends to attract capital,” he said. “However, this approach failed to support the overall total and risk-adjusted returns for investors.”
A Schroders spokesperson described the Schroder Income fund as “one of the few genuine value funds in the equity income space” and said that had caused performance to lag peers and the wider market.
“However, as recognised by rating agencies and consultants, the fund retains a highly regarded process which specialises in out-of-favour companies with long-term potential. We continue to provide an important role in our client’s portfolios.
“The outlook for dividend growth from today’s level is strong, and, as the performance of the fund yesterday highlights, as and when the market environment turns the returns should be significant.”
See also: Does the departure of value stalwarts signal an end for the investment style?
