Over the past decade, it has been a rollercoaster ride for investors in “value” stocks. Although these cheap and often unloved shares have been in the doldrums for a large part of this period, things appear to be changing.

Kevin Murphy, who co-­manages the Schroder Income fund, believes there is scope for value stocks to deliver significant returns over the next three to five years given the large valuation gap that still exists between value and “growth” shares.

He focuses solely on cheap companies that appear to have been misunderstood or excessively punished by investors. It is then a question of waiting for the dark clouds to clear and for share prices to rise accordingly.

Over the past 12 months, his £1.2bn fund has returned 5.3pc, against UK equity income rivals’ average loss of 0.5pc. Over three years the fund has gained 18pc, compared with 9.8pc by peers.

How do you pick stocks?

In the stock market, you can either have good news or cheap shares, but you can’t have both. You have to choose one of those things. Understandably, people want good news, but more than a century of data shows that if you buy cheap companies and are patient, you can make extraordinarily good returns.

We focus exclusively on cheap shares, which means embracing negative headlines. We screen the market for companies that look cheap based on historical profits, sales, and assets. Then we try to understand why a company looks cheap, the negative headlines it faces, and whether they are temporary or permanent.

If we believe the company looks cheap and the headwinds are temporary, we invest and then we wait. As the headwinds abate, the share price can increase ­significantly.

Where are the opportunities?

They are in consumer-facing areas, where there is bad news. The British consumer is under extreme pressure from inflation, an economic slowdown, higher interest rates, weak wage growth, and the cost of living crisis.

We are not naïve: we understand that this challenging environment may continue for some time.

Why are you investing in this area now?

Simply because the stock market knows the consumer is under pressure and share prices have moved to reflect that.

Some consumer shares are down by two thirds over the past year. Not all of these companies will survive, so we are extremely selective about the ones we invest in. We do detailed work on the balance sheet to ensure the company can endure dark days for some time to come.

But at some point the things holding consumers back will abate. The stock market will move first, so our portfolio needs to be positioned ahead of them.