Value’s darkest days have tended to precede periods of extreme light

Past performance history clearly tells us nothing about the future but, when you have a quarter of a century of audited and digitised data, it can certainly raise some interesting ideas


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

People who want to be above average can’t expect to get there by engaging in average behaviour. Their behaviour has to be different. And in the course of trying to be different and better, they have to bear the risk of being different and worse.

Howard Marks, chairman of Oaktree Capital


Written five years ago by one of The Value Perspective’s favourite investors, these lines from client memo Dare to Be Great II should inspire contrarians of every kind – but may be of particular comfort to those who follow a value-based investment strategy.

For there is no denying that, for much of the decade since the global financial crisis, they have largely fared “different and worse” than their more growth-focused counterparts.

Taking a longer-term view, of course, value investing more than holds its own in performance terms – and while some might immediately retort that what has been and gone has little bearing on the here and now, here on The Value Perspective, we would strongly argue otherwise.

Over the last 25 years, as we are about to show, the darkest days of value have tended to precede periods of extreme light.

Light at the end of the tunnel?

Investment performance is an area all professional investors must approach with caution and so, in addition to concentrating firmly on the knowable past rather than an unknowable future, we are going to keep things simple by focusing on just one of the portfolios we manage.

In this case it's our flagship Schroder Recovery Fund. 

One notable aspect of this fund is its good performance data – and, to be clear, when we say ‘good’ in this context, we mean it has an auditable, digitised history that dates back more than 25 years.

Not many funds are able to say that and what this allows us to do is to analyse not just whether performance has been good or bad but also how it has been delivered.

The headline good news we can immediately take, then, is that someone who invested in the fund back in 1994 would have seen it outperform its benchmark index by 430 basis points – each year on average and net of all fees – over the next quarter of a century.

Less positively, however, the fund has seen some mixed annual performance of late – doing nicely enough in 2016 and 2018 but rather less well in 2015, 2017 and 2019.

As a result, the fund’s five-year rolling returns have now turned negative but, given we have this very crunchable set of numbers, we can look at all the five-year periods over the last 25 years and understand whether this is an anomaly, say, or a recurring feature of the strategy.

From January 1994 to July 2019, when measured on a monthly basis, there have been 248 five-year periods and their returns are all set out below.


We have grouped all the month-end five-year returns according to the degree to which the fund outperformed or underperformed its benchmark and, as you can see, it was in positive territory significantly more often than it was in the red – four time as often, in fact.

What is more, the fund outperformed its benchmark not only in terms of frequency but magnitude too – as you can see from there being twice as many positive buckets.

Those two factors combined to deliver that 430 basis points of historic annual outperformance and yet, as we said and as highlighted in the above chart, the fund has just crossed over into negative territory.

So here’s an interesting question – given all the data we have at our fingertips, what can the past tell us about what might happen next?

Yes … technically, it tells us nothing at all because, of course, past performance has no predictive powers – indeed, our compliance team ensures we explicitly state this.

What we can do, however, is look back to the other times since 1994 that the five-year rolling returns of the Schroder Recovery Fund have turned negative and see how the fund went on to perform over the subsequent five years.

The following chart is our attempt to illustrate that.



As you can see, this is the same chart as the previous one – only with a new colour scheme for the three negative buckets.

First up, the dark blue bars all relate to negative five-year periods that end at some point in 2019 and since, of course, we do not know what the next five years will hold, we cannot offer a rolling-five year figure for those.

For the other bars, however, we can, as they all relate to periods a lot further back in the fund’s history – the teeth of the financial crisis in 2008 and 2009 and the top of the tech bubble in 1998 and 1999.

These were the sort of extreme market environments that were required to send the fund’s five-year rolling returns negative – and it is also what we believe we are seeing with markets today.

That, though, is by the by – what matters is the how the fund has done in the five years that followed negative five-year periods and the colour scale is designed to show how good, or not, that was.

It runs from yellow to dark green, with the latter being the stronger performance – and what you can therefore see from the table is the more negative the initial five-year period, the better the subsequent returns have tended to be.

Make most money in a bear market...

There is an old stockmarket adage that holds “Investors make most of their money in a bear market, they just don’t realise it at the time” – and the above chart is an illustration of this idea in action.

Those extreme market environments that pushed the fund into negative territory over five years also provided the opportunities for us to buy stocks at extremely low valuations and go on to perform extremely well.

We would also point out that the very worst five-year showing for those post-negative return five-year periods was a positive 8.5% outperformance per year while the darkest green buckets are pushing up towards 17% a year outperformance.

And while the average outperformance for all 248 of the fund’s rolling-five year periods was 4.3% a year, if we restrict ourselves solely to the yellow and green bars, that figure rises to 12.5%.

To put it another way, not only have every single one of those post-negative return five-year periods gone on to outperform the fund’s benchmark, they have done so by an average almost three times that of the overall sample.

As we say, this quarter-century of data from the Schroder Recovery Fund guarantees nothing about what the next five years will bring but it is, as we also say, interesting.


Schroder Recovery Fund performance

Performance versus index in GBP %






Schroder Recovery Fund A Inc






FTSE All-Share Index (TR)






Relative return






Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Source: Morningstar, bid to bid, net income reinvested, net of fees, GBP, based on A Inc Units. The fund is not managed with reference to a benchmark, but its performance may be measured against one or more.


Risk factors

The fund may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the fund, both up or down, which may adversely impact the performance of the fund.

The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses.

The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only.

Equity prices fluctuate daily, based on many factors including general, economic, industry or company news.

In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of
its shares.

Failures at service providers could lead to disruptions of fund operations or losses.

The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund.

A derivative may not perform as expected, and may create losses greater than the cost of the derivative.

The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.