‘America’s tech giants will eventually crash’

‘Value’ investor Simon Adler, of Schroders, tells Sam Benstead why 100 years of stock market history points to a recovery for cheap stocks

The last time Telegraph Money spoke to the managers of the £1.1bn Schroder Global Recovery fund, it was down in the dumps. From January to November 2020, it lost investors 26pc as government lockdowns crushed the profits of the “cheap” companies it bought, mainly oil and banking stocks which relied on the physical, not digital, world.

But its approach had been out of favour for far longer: between launch in 2015 and November 2020, it made investors just 21pc compared with 76pc for a global stock market tracker.

But everything has changed with the development and distribution of Covid-19 vaccines. Investors are now betting on higher interest rates and inflation, which make companies that promise to make money in the future less attractive than those that make a lot of money today.

The fund has returned 34pc since the vaccine announcement in November 2020, more than double the average manager and the global stock market. Its co-manager, Simon Adler, tells us how the fund is managed and why its return to form has only just begun.

WHO IS THE FUND FOR? Investors who want to own cheap stocks. Typically people own our fund alongside other strategies that invest in more expensive shares. We are the “value” portion to balance out “growth” investments for both DIY and professional investors.

HOW DO YOU PICK STOCKS? We only buy shares that are in the cheapest 20pc of the market compared with their profits. We look for companies that are out of favour but can bounce back.

We are very strict with what makes it into the fund: we say no to 90pc of the companies we look at.

We have an archive of 2,500 company investigations and each year we revisit what went well and what went badly so we are constantly improving.

WHY ARE CHEAP SHARES BETTER THAN EXPENSIVE ONES? It is logical and profitable to buy companies when they are cheap and sell them when they are expensive. For example, £10,000 invested according to a “value” approach in 1926 would be worth almost £1bn today, but the same amount invested in “growth” stocks would be worth just £100m.

This has happened despite revolutionary technological changes and we think the trend will continue. What goes up typically comes down and we expect cheap shares to catch up once again because fast-growing shares have rarely been so expensive.

Even though our fund has not beaten strategies that buy the most popular stocks, we have still made investors just over 10pc a year since 2015.

WHERE ARE YOU FINDING OPPORTUNITIES TODAY? We like banks. Shares are very cheap relative to profits and they have high dividend yields and record amounts of cash. In the last financial crisis they were part of the problem, but now they are the solution to getting the economy going again. Interest rates increasing is a bonus as their profit margins improve.

Oil is another area we like. We bought energy stocks when the oil price went negative in 2020 and still own them. The oil price has risen but firms are not drilling for more oil, which points to high prices for a long time.

We do not make forecasts about oil prices but we know that even a lower price would not affect the investment case for oil and gas companies. We win regardless as a high price is not part of our valuation model.

DO YOU AVOID TECHNOLOGY? Not always. We invested in Microsoft in 2011 and own a couple of technology stocks at the moment. One is Western Union, the international payments firm. It is priced as though it is about to collapse but it actually has a fantastic and well- established business that is hard to disrupt because compliance requirements for payments are so complicated around the world.

The big American tech stocks have fantastic businesses but are too expensive. Prices will inevitably come down just like they did in the Dotcom crash.

WHAT HAVE BEEN YOUR BEST AND WORST INVESTMENTS? Our best was Anglo American, the miner. We started buying it at 763p in 2015 and kept buying shares as they fell. We made it a big part of the fund when they cost 293p. We still have a position today and shares cost £35. This was also our worst trade as shares fell 80pc in a year. However we believed in the turnaround story and kept buying regardless.

WHAT WOULD YOU BE IF NOT A FUND MANAGER? I played football growing up and still get on the pitch when I have time. My dream career would have been playing for Norwich City.