The MSCI World Value index has underperformed the wider MSCI World over the past one, three, five and 10 years, a challenging backdrop for any value manager to attempt to outperform.
As high-growth tech stocks have led the market, value managers have slipped further behind, with the MSCI Value index only beating its wider counterpart in three of the past 10 years, according to data from FE fundinfo.
Despite this growth-heavy market, Simon Adler’s Schroder Value team have managed to keep up.
Over the past five years, the Schroder Global Recovery fund (which Adler has managed since 2018) was a top-quartile strategy in the IA Global sector, delivering a 73.2% total return for investors, beating the MSCI World’s 67.6% return.
For Adler, this strong performance is a matter of discipline.
“’No’ is the most important word in investment,” he told Portfolio Adviser. “We say ‘no’ to most of the things we look at.”
As deep value investors, Adler’s team only invest in the absolute cheapest companies on the market. However, they need to be very conservative about what they buy, according to the veteran manager.
Over the past decade, the Schroders value team’s ‘passes’ (the number of stocks they say no to) have risen by around 17%, he explained.
“We’re willing to take risks when we’re compensated, but a lot of the time you just aren’t compensated,” He explained. “You’ve got to be dispassionate, say no most of the time, and only buy when you see a real ruby in the rubble.”
He said this was a lesson the team learned during the dot-com bubble, where investors could have purchased “terrific businesses with fantastic performance” and still underperformed because the share price was too high.
“It doesn’t matter how good the business is, if you pay the wrong price for it, you’re losing money,” he said.
This willingness to say no was particularly important in modern markets, where stocks can fall in and out of favour rapidly, Adler added.
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For a good example, he pointed to the banking sector.
Adler and his team added to banks years ago when they were on compelling valuations, even when the market seemed to hate these stocks, he said.
This worked out well, with the MSCI World Banks index having surged 121.3% over the past five years, while the wider MSCI World is up just 71.6%.
However, as valuations rise, Adler said it has become more difficult to find compelling value in financials.
“When something hits fair value, you have to sell it and move on,” he said.
‘Fear and greed’
That said, while Adler and his team are relatively cautious, there are plenty of pockets of good value opportunities throughout the global market, according to the manager.
This is demonstrated by the fact that while the number of stocks they have passed on has risen by 17% in the past decade, the amount they have purchased has risen by 30% over the same period.
“Even in the US, which is a deeply bifurcated market where there are plenty of stocks that would right make you feel sick on a valuation level, there’s also plenty of stocks that are very cheap,” he said.
The US currently represents 33.9% of the stocks in the Global Recovery fund. While this is an overweight of almost 40% compared to the MSCI World it is benchmarked against, it is still the largest regional allocation in the fund in absolute terms.
He is not the only manager to identify value opportunities in the US; experts from Artemis and Brickwood also highlighted value stocks in the US earlier this year.
“Within the US today, anything to do with construction looks very attractive,” Adler said.
There is scope for a significant rebound of construction levels in the US that can support share prices, which will take time, Adler conceded, but can pay off for patient investors.
Within the Schroder Global Recovery fund’s top 10 allocations, American manufacturing and oil company Haliburton is the largest holding at 2.7% of the portfolio. Flooring manufacturer Mohawk Industries also features in the top 10 of the portfolio.
Another area of interest was in formerly popular stocks such as alcohol businesses, according to Adler.
“The value opportunity set evolves as a function of fear and greed,” Adler explained. “Five years ago, people were greedy for alcohol businesses, and now they’re fearful of them, so now they are much more attractive than they used to be.”
Within the Schroder Global Recovery fund, multinational drinks company Molson Coors, responsible for brands such as Carling and Coors Light, is a top 10 allocation.
“If I look at the opportunity set, I think we can find genuinely unbelievably attractive ideas right now, whether that’s in Japan, North America, the UK or Europe,” he concluded.
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