Global equities gained ground in Q2. The portfolio outperformed the benchmark. The fund’s selected financials and US for-profit education holdings drove its outperformance. Mining names detracted from returns having performed strongly throughout 2016.

Growth’s continued march north has come about courtesy of the US IT sector (driven by the so-called FANGs: Facebook, Amazon, Netflix, and Google), and consumer staples in the UK and continental Europe (driven by the so-called ''bond proxies''). In the first half of 2017, the valuation gap between these racy US tech companies and sleep-easy bond proxies, and everything else has become wider. We are increasingly fearful of the former as in equity investment, valuations will always triumph over quality in the long run because as their valuations rise, stable businesses can become very dangerous investments.

There is, however, some comfort to be found in value’s underperformance over the first half of 2017. Across the globe, the majority of the performance gap between value and growth can be accounted for by the higher price/earnings (P/E) multiples of growth stocks. In other words, investors have been willing to pay even more for those ''growth'' companies than in the past. An environment where P/E multiples are rapidly outstripping even the most bullish of sell-side analyst forecasts has echoes of the long build-up to the dotcom bubble in 2000. It is evidence of a classic behavioural bias where investors extrapolate current trends when forming future expectations.

While we would rather avoid periods of underperformance, there are better and worse ways to underperform the market over short time periods. The valuations of growth stocks are now pricing in ever-higher future earnings despite global profit margins nudging to all-time highs. History suggests that this cannot last forever, and in the past a market dislocation such as we are seeing now has been a precursor to value’s outperformance as expensive growth companies withdraw to lower valuations.

Valuations will always triumph over quality in the long-run, because as their valuations rise, stable businesses can become very dangerous investments. Moreover, even as stylistic headwinds periodically hinder progress, value continue Source: Schroder ISF Global Recovery quarterly fund update - Second quarter 2017 Disclosures

The fund delivered positive absolute returns over the first quarter.

We established a position in KIA Motors, which we feel is trading on an attractive valuation and has a relatively solid balance sheet. We begrudgingly sold the fund’s position in US for-profit education provider Apollo Education, as the bid to take the company private completed.

The value investment style enjoyed a partial rebound at the end of 2016 but this tailed off in early 2017. However, we do not think the value rally is over. The level of value’s underperformance to growth remains wider than the level last seen during the dot-com bubble in 2000. We believe a strict adherence to a deep-value approach will reap significant outperformance over the long-term. The short-term trade-off is that we never know how long it will take for the market to recognise the value of our investments.