Zero to hero: the resurgent funds the experts say you should buy

Funds hit by the pandemic in 2020 are recovering this year. Jonathan Jones names the top picks

The turnaround in stock markets as lockdowns ease, lifting the shares of companies hit hardest by the pandemic, has sent funds that were languishing at the bottom of the performance charts last year surging to the top of the table.

The rebound in the shares of “value” companies, such as high street retailers, banks and leisure and hospitality firms, follows prolonged poor performance and heavy falls last year.

Funds that own them racked up losses for their investors and trailed rivals in 2020 but have now sprung into life. Among funds that invest in British stocks, 60 that were among the bottom 25pc performers last year are now in the top 25pc for 2021.

Sam Buckingham of Kingswood, an investment manager, said the value stocks these funds held should continue to do well as coronavirus restrictions were relaxed. “As the economy gradually reopens, boosting consumer spending, I have a positive view on the economically sensitive sectors that dominate the value parts of the market,” he said.

A select few funds have shown the ability to deliver returns over the long term even when their investment style is out of fashion and are worth backing, according to experts.

Telegraph Money has picked out three funds that have not only rebounded this year but also pass this test. Jupiter UK Special Situations, JOHCM UK Dynamic and Schroder Recovery have all moved into the top 25pc of performers this year after a difficult 2020, but each has also beaten the return of the FTSE All-Share index – a barometer for the London stock market – over the past five years.

Gill Hutchison of the Adviser Centre, a fund rating firm, said: “For investors who are seeking a value portfolio, we recommend all three.” Other experts agree, identifying the turnaround trio as strong options for investors who want to bet on a continued resurgence for British value stocks as the economy reopens.

There were three other, lesserknown funds that achieved the feat. Barclays UK Opportunities, Dimensional UK Value and Schroder Responsible Value UK Equity have also leapt up the performance charts, rising from the bottom in 2020 to the top 25pc so far this year.

‘For investors who want a value fund, we rate all three very highly’

SCHRODER RECOVERY Rob Morgan of Charles Stanley, the fund shop, said the £1.1bn fund was the “deepest value” of the three. Its managers, Nick Kirrage and Kevin Murphy, buy shares in companies that face financial or operational challenges but have the potential to recover.

“This is a specialised form of investing that can lead to as many losers as winners – however, the magnitude of the winners’ gains can more than make up for the losers over time,” he said.

The fund has large positions in financial firms such as banks and insurers, which make up more than a fifth of the portfolio. These companies have benefited from rising bond yields and the potential for higher interest rates, as this increases their profitability.

Mr Morgan said: “I would consider this a smaller position in a portfolio but one that could add real long-term value.”

JUPITER UK SPECIAL SITUATIONS Rory Maguire of Fundhouse, a research firm, said this was a similar fund to the Schroders portfolio.

“In fact the current managers of both used to work together in the same team, when Ben Whitmore, now at Jupiter, was at Schroders,” he said. Almost a quarter of the £2bn fund is held in financial stocks but top holding BP has been the standout.

Although shares in FTSE 100 oil stocks have yet to regain their pre-pandemic levels, a recovery in the price of Brent crude has helped them rebound this year. BP has been the pick of the sector with a gain of 20pc.

JOHCM UK DYNAMIC Alex Savvides, manager of this £1.1bn fund, focuses on finding companies with catalysts for improvement such as new management or reorganisation.

Mr Morgan said that while the fund had a value focus, Mr Savvides also focused on companies’ growth potential. “He also emphasises growth qualities such as strong brands and competitive advantages and the companies must pay a dividend, which helps ensure they are more disciplined when it comes to cash flow,” he said.

Darius McDermott of FundCalibre, a research firm, said the fund’s holdings in services companies were hit hard in the pandemic but Mr Savvides had been active, supporting fundraising by strong businesses but selling stocks he believed had little chance of recovery.