The Schroder Recovery Fund (B3VVG60) aims to generate capital gains superior to the FTSE All-Share Total Return Index, net of fees, over a three- to five-year horizon by investing in ‘UK companies which have suffered a severe setback in either share price or profitability’.

The fund was launched back in 1970 and has stood the test of time, beating its target return over one, three and 10 years and matching it over five years.

In the year to September 2020 the fund underperformed as investors chased lockdown-related growth stocks, but in the year to September 2021 and again in the year to this September it has outperformed as value stocks have found favour.

‘The UK equity market has been cheap for some time, and it’s getting cheaper,’ say managers Kevin Murphy and Andrew Lyddon in their second-quarter commentary.

‘While the market appears to be increasingly concerned about runaway inflation, and the Bank of England needing to break the economy to bring it under control, the good news is that this is already priced in.

‘We are confident our focus on cheap stocks (within a cheap market) and minimising fundamental risks will be rewarded with significant outperformance.’

As of the end of September, the portfolio was overweight consumer discretionary, industrial, telecom and real estate stocks compared with the FTSE All-Share Total Return Index, and underweight financials, consumer staples and healthcare, the latter by a considerable margin.

The top 10 holdings, which made up just over a quarter of the fund by value, were: energy company Petrofac (PFC), infrastructure firm Kier Group (KIE), retailer Marks & Spencer (MKS), high-street lender Barclays (BARC), Italian energy group ENI (ENI:BIT), shopping centre owner Hammerson (HMSO), Asia-focused bank Standard Chartered (STAN), mining giant Rio Tinto (RIO), retail banking group Lloyds (LLOY) and Royal Mail owner International Distributions Services (IDS).

The managers made two changes in the most recent quarter, selling out of power firm Centrica (CNA) and reducing their holding in aero engine maker Rolls-Royce (RR.) as one had reached their estimate of fair value and the other was nearing fair value, which gives an insight into their active approach when it comes to running the portfolio.

Other holdings referenced in the report were online fashion retailers ASOS (ASC) and Boohoo (BOO:AIM), free-to-air TV broadcaster ITV (ITV), bus and rail firm FirstGroup (FGP) and car spares retailer Halfords (HFD).

Income is paid annually and being the accumulation class is rolled over into buying more shares, while the ongoing charge is 0.89% per annum.

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