HEAD-TO-HEAD: Merian versus Schroders

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Investment approach

“Neither the Merian nor the Schroder fund is out-and-out value in style, but both managers still have a belief that a company’s valuation – and what you pay for it – is important,” said McDermott.

“This means that both have experienced a headwind over the seven years they have been managing these funds, as growth styles have outperformed,” he said.

The Merian UK Alpha Fund is a high conviction portfolio of 35-to-40, mostly large, UK companies that manager Richard Buxton believes have strong business models, healthy balance sheets and as yet unrecognised potential, according to McDermott.

It also has a low turnover with an initial three- to five-year investment time horizon.

The objective of the fund is to seek to achieve capital appreciation, and to deliver a return, net of fees, greater than that of the FTSE All-Share Index over rolling three-year periods.

“The process is about understanding what the key drivers of returns are for individual firms and Buxton is particularly interested in change within companies or industries, which might present opportunities,” said McDermott.

“There is also a focus on the quality of management and the governance structures which are in place to protect shareholders,” he added.

Meanwhile, the Schroder fund aims to generate capital growth in excess of the FTSE All Share Total Return Index after fees have been deducted over a three- to five-year period.

The fund is actively managed and invests at least two-thirds of its assets in equities of UK companies.

Its approach is grounded in the belief that sentiment drives share prices in the short-term, so companies with strong long-term prospects often become undervalued by the market.

“In fact, the Schroder fund is managed by Alex Breese in a similar way to Merian approach,” said McDermott.

“Breese looks to invest in undervalued companies that have scope for positive change thereby realising the valuation anomaly over the medium- to long-term,” he said.

These could be turnaround stocks – those with new management – cyclical recovery and undervalued growth stocks.

Breese also requires companies with strong balance sheets and portfolio turnover is typically quite low, according to McDermott.

“Given the similarities in style, you would expect the Schroder fund to outperform and underperform at similar times to the Merian fund,” he said.

“However, in down markets it doesn’t tend to fall quite as much, but it lags in strong markets, which has had the cumulative effect of making performance weaker overall, said McDermott.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 August 2020

 Top 10 holdings:

Source: Fund factsheets, 31 August 2020

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