Global equity markets advanced in the third quarter, shrugging off the immediate post-Brexit shock. The rally was quite evenly distributed with all major regions enjoying strong returns. Volatility was markedly lower than recent quarters (albeit with an uptick in September) as investors seemed reassured that the principal central banks maintained their accommodative policy stances.

In style trends, it was cyclical sectors that outperformed during Q3 and defensives that trailed. Leaders of the pack were technology and materials, and the laggards utilities, telecoms and consumer staples. This year's rotation into resources continues, with materials particularly strong in the third quarter, supported by rising commodity prices. The financial sector also did well, in part due to the good performance of banks amid rising expectations of an interest rate increase in the US by year end. This came despite somewhat mixed local economic data and the advance of US equities over the quarter was more modest compared to other global regions. The backdrop of a tightly contested presidential election campaign and a fine imposed on Wells Fargo over a fake-account scandal appears to have rattled investor sentiment.

The fund outperformed over the third quarter. North America was the largest regional contributor and a good portion of this was thanks to our underweights in US utilities, REITs and staple

Overall we would describe 2016 so far as a year of modest rotation with previously losing sectors (e.g. resources), regions (e.g. Emerging Markets) and styles (e.g. Value) pulling out of a steep dive in performance. But there is significant relative performance still to be accrued for contrarian investors.

Source: Schroder ISF Global Recovery Quarterly Fund Update - Third Quarter 2016

The fund delivered a positive absolute return in the first quarter and outperformed the index. We sold out of a number of positions that have been held in the portfolio since inception and that have performed strongly. Banks Standard Chartered and HSBC were added to the fund.

Anglo American rebounded strongly over the first quarter. The share price came under severe pressure in 2015 and this continued into the New Year. As a result, we continued to add to our holding and were purchasing shares as late as mid-January. Just one month later, we were reducing our position as a significant share price rally caused the position size to double. Anglo American's share price moved up from a low of 221p on 20 January to 480p on 29 February - a 117% rise in five weeks. This rapid rise highlights the extent of the market's prior panic, rather than a recovery in the fundamentals of the business. In our view, Anglo American remains significantly undervalued, it has a reasonable balance sheet to see it through these tough times (its gearing is only about 60% and there are no bond covenants or repayments of note for several years) and the potential share price upside is significant. Also in the mining sector, our positions in South 32, ArcelorMittal South Africa, Impala Platinum and Lonmin were among the largest positive contributors as they rebounded to better reflect fundamentals rather than short-term sentiment.

Our chosen banks had a difficult period in share price terms in the first quarter. Royal Bank of Scotland revealed its eighth consecutive year of annual losses, and cautioned it would have to delay resuming dividend payments or share buybacks beyond the first quarter of 2017. Barclays' financial results were disappointing also, and included a dividend cut to preserve the bank's balance sheet. Bank stocks generally have only been cheaper in early 2009 and late 2011 - when systemic risk was at a peak - yet profitable new business is helping them build significant excess capital. For the time being these profits remain masked by losses on legacy assets and exceptional charges. Over the longer-term, however, we believe the ongoing improvement in their core businesses will warrant significant share price increases. We took advantage of price weakness to add to our positions during the quarter.

Having underperformed Growth for the longest-period on record, the first three months of 2016 have seen Value rebound to outperform Growth as an investment style. We, however, are not getting carried away. Humans have a tendency to extrapolate current trends when forming future expectations and the performance of the past three months may or may not prove to be the beginning of a sustained return to the market's typical function as an arbiter of value. The only certainty today is that value investing has displayed a consistent pattern of mean reversion over more than 100 years.

Source: Schroder ISF Global Recovery Quarterly Fund Update - First Quarter 2016