Schroders’ Kirrage: UK ‘value’ banquet should run into 2021


Schroders fund manager Nick Kirrage has argued that a major shake-up in the inflationary and economic environment is not necessary for out-of-favour UK stocks to keep enjoying stronger gains next year, as coronavirus and Brexit uncertainties fall away.

A spate of positive trial results for Covid-19 vaccines has spurred a recent bounce for so-called ‘value’ stocks – overlooked, higher-yielding businesses that trade on cheap valuations compared to highly-rated ‘growth’ companies – with a road to recovery opening up for struggling sectors. 

‘It feels a little bit like someone’s brought out a three-course meal into the desert after five years. You’re not sure whether you should eat it or not,’ said Kirrage.  

‘The other thing to say is you’re not going to get yourself back in shape off one meal and it’s been very lean pickings over the last five or six years. We very much hope that this augurs well for something a little bit more substantial over the next couple of years.’

From the beginning of the month to 27 November, the £1.5bn Schroder Income fund, which Kirrage runs with Kevin Murphy, shot up 24.5%, according to Morningstar data. Meanwhile, the pair’s £787m Recovery fund, also focused on UK shares, jumped 26% as the FTSE All-Share index notched up a 14.4% gain.  

However, that dramatic rotation follows protracted poor performance for Kirrage and other value investors, leaving a lot of catching up to do. 

The Global Recovery fund has perfomed equally poorly, losing 19% in the three years to the end of October as the average fund gained 18%, placing the fund at number 604 in the performance tables out of 612 Global funds. 

The £312m Schroders fund – co-managed by Simon Adler, Liam Nunn and Andrew Lyddon – has posted a 22.7% return so far in November, outstripping the MSCI World index’s 10% gain.

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‘We don’t need inflation’

Kirrage (pictured) argued against the consensus that a marked change in the economic backdrop is needed for the rally to continue, even though past periods of strong performance for ‘value’ stocks have often correlated with inflation, as investors place more weight on short-term profits than anticipated future growth.

‘The narrative that you hear from people is you need more of a sustainable rotation in some of the big macro beasts, things like interest rates or inflation or gross domestic product,’ he said. 

‘What we would say is that actually [with] the valuation underperformance that we’ve seen over a long period of time, I don’t think you necessarily need to see any of these things to see things be a lot better for value.’

Kirrage said that was partly because these stocks were already trading at such a wide discount to the wider market, leaving room for a further bounce. But the more important factor was that the major unknowns which have been hanging over some value sectors should abate, he argued.

For the banking sector, those have been risks around regulation and Brexit, the manager said, while for cyclical stocks exposed to the fortunes of the wider economy, there has been the unknown duration of the pandemic.

‘From my perspective a lot of what’s hurt value over time is the way in which people have looked at these investments is they’ve been full of uncertainty,’ said Kirrage. 

‘Good or bad, Brexit will be in the rear view mirror within six months, within three months. The virus vaccines might happen sooner or later. They will happen, it’s quite clear, and we will move inexorably forward.

‘And some of these stocks, I think, will do better in that environment where it’s clearer what the future looks like.’

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Hidden dividends, sleeping giants

Kirrage (pictured) argued that the UK market and banks, especially, represented a strong opportunity. Until this month, these ‘sleeping giants’ had been trading on valuations comparable to the depths of the financial crisis, despite being many times better capitalised today.

Across the funds, there are significant stakes in NatWest (NWG), Standard Chartered (STAN) and Barclays (BARC).

UK lenders were made to halt dividend payments by the City regulator early in the pandemic, but the manager emphasised payouts had been deferred. With some banks trading at around half of book value – the value of assets on their balance sheets – there are effectively bumper ‘hidden dividends’ ready to be unlocked, he argued.

Kirrage emphasised the well-known brands and high barriers to entry in the space, while arguing that much of the negative effect of low interest rates, which hit banks’ profits, was already ‘baked in’ to their share prices.

‘These are businesses which aren’t very exciting but over time they should be very dependable, they should pay you a very decent dividend yield and they’ve got pretty strong balance sheets,’ he said.

Oil opportunity

The manager also heralded the value in oil and gas companies, while acknowledging that the sector was ‘a total lightning rod at the moment’ and that holdings like BP (BP) were probably not appropriate for explicitly sustainable funds. However, he argued that shareholder engagement remained important, helping push the company to its recent strategic shift towards decarbonisation.

‘This idea that investors will disinvest from BP and that’ll change the world is a bit naive because actually BP’s equity, in fact, all the listed equity, is a minute proportion of all the money that’s invested in oil and gas,’ he said.

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‘I think for more funds, even where they’re investing with ESG at the heart of what they do, it’s not about avoiding those stocks. It’s about changing things for the better.’

Kirrage said BP featured an attractive combination of a high and payable dividend – with the yield running around 6.2% based on the halving of the dividend in August – while the shift towards renewable energy could eventually see the company rerate to a higher multiple. 

Kirrage picked out Marks and Spencer (MKS) as particularly promising, focusing on the potential of its 50:50 joint venture with Ocado (OCDO)’s UK retail business. M&S products replaced Waitrose’s on the online supermarket at the beginning of September.   

‘It’s a business where nobody seems to have realised that they own half of the UK Ocado business and Ocado has gone [through] the roof,’ said Kirrage. The manager argued with half of M&S now effectively plugged into a quickly growing business, the remaining challenge for the company was to improve rather than reinvent its clothing segment.  

Other holdings highlighted by Kirrage included recent buys Rolls-Royce (RR) and M&G (MNG), as well as top holding Anglo American (AAL), with commodity prices continuing to be supported by China’s rapid recovery. The manager added that supermarkets represented an attractive non-cyclical play. Tesco (TSCO) is a big position in some of the funds. 

The team has been taking profits in better-performing sectors like healthcare, a feature in the funds through major holding GlaxoSmithKline (GSK).

Kirrage also manages the £794m Income Maximiser fund with Murphy and Mike Hodgson, and the £221m Global Equity Income fund with Nunn and Adler. 



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