Schroder UK Mid Cap (SCP ) fund manager Jean Roche (above) is oozing confidence as the investment trust she has run with Andy Brough since 2016 sweeps past its two main rivals, having recovered strongly from last September’s lows.

Annual results in December showed the mauling the £194m trust took in the 12 months to 30 September when the war in Ukraine, soaring inflation and political turmoil in Downing Street combined to deepen the clouds over UK equities, particularly those outside the FTSE 100 where Roche invests.

In its last financial year net asset value (NAV) tumbled 30%, underperforming the 26.8% decline in its FTSE 250 index benchmark. In the past six months, however, there has been a marked turnaround with NAV rebounding 17.4%, with the recovery matched by the 18% gain in the share price.

Even better, the rally has seen Roche put clear water between her 55-strong portfolio and the £192m JPMorgan Mid Cap (JMF ) and its £1.5bn stablemate Mercantile (MRC ). According to Morningstar data, Schroder UK Mid Cap has provided a 55.2% total return to shareholders since she took over in September 2016, three months after the Brexit vote shock. This convincingly beats Mercantile’s 39.3%, JMF’s 22.8% and the benchmark’s 22%.

The outperformance comes as the trust has lifted its borrowing with gearing at a decade-high of 8.9% to ensure Roche has the means to seize attractive opportunities when they arise. ‘It’s certainly a different picture to when I took over the fund in 2016 and we had about 6% cash,’ the manager said.

As for 2023, Roche (pictured) has been encouraged by the portfolio’s largely ‘better than expected’ results and ‘strengthened’ balance sheets. Medium-sized companies had been generating huge amounts of cash, she said, noting FTSE 250 constituents’ earnings cover dividends three times while FTSE 100 companies have two times cover.

She told Citywire that almost half the portfolio had been buying back shares or looking to acquire other companies, emphasising just how much cash is available. About 80% of companies have net debt of below one times pre-tax profits, which is essential in a high-interest-rate environment, she said.

As a result, Roche expects a large number of mergers and acquisitions this year, with ‘pent-up demand’ following the low number of bids in 2022, which Roche attributes ‘mostly to fear’.

She has identified cybersecurity and defence stocks as a cheaper way to access technology, including NCC (NCC) and Qinetiq (QQ).

The recent purchase of Babcock (BAB) also offered ‘unique’ nuclear exposure at a good value, given what she called its ‘misunderstood’ balance sheet.

SCP’s consumer exposure matches the index at 22%, with the ‘oversold’ Watches of Switzerland (WOSG) also recently added to the portfolio. The company has fallen 25.5% since early February after reporting lower third-quarter luxury jewel revenue.

‘It was oversold in the general retail malaise and has been volatile but with its growth profile, there is value. It offers unique exposure to luxury watches and recently allowed second-hand Rolexes to be sold in-store,’ Roche said.

Convenience chain WH Smith (SMWH) was also brought in, offering a strong balance sheet and exposure to the travel sector through its airport shops.

SCP trades at an 11.9% discount to NAV. In the past, the board actively attempted to narrow the discount with share buybacks but is not currently doing so, Roche said.