Schroder ISF Global Convertible Bond. Monthly Fund Update. 10 year anniversary. Market Overview. Historical Performance USD

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1 Marketing material for professional investors or advisers only Schroder ISF* Global Convertible Bond Monthly Fund Update 10 year anniversary Market Overview Performance % USD EUR CHF August year 3 years (p.a.) 5 years (p.a.) I class 1.46% 5.55% 5.91% 6.18% A class 1.33% 3.93% 4.28% 4.52% BM 1.15% 2.81% 3.70% 4.74% I class 1.18% 3.02% 4.19% 5.12% A class 1.05% 1.44% 2.57% 3.47% BM 0.91% 0.58% 2.23% 3.82% I class 1.19% 2.64% 3.73% 4.70% A class 1.06% 1.07% 2.12% 3.06% BM 0.89% 0.23% 1.81% 3.41% Source: Schroders as at 31 August All performance data shown bid to bid, net of fees Historical Performance USD Fund (A Acc) Fund (I Acc) BM % 9.0% 6.0% % 3.2% 1.6% % 4.8% 3.8% % 5.7% 4.7% % 17.7% 13.0% Benchmark: Thomson Reuters Global Focus Convertible Bond Index (hedged for USD/EUR/CHF). All performance data shown bid to bid, net of fees. Source: Bloomberg/Schroders as at 31 December Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. August turned out to be yet another very strong month on US stock markets. Both, Nasdaq and S&P marked new historic highs. Investors are clearly moving capital to the US as the region is seen as a safe haven. Earnings season has been broadly positive and this strengthens both the US dollar (USD) as well as the stock markets. Elsewhere a markedly different picture emerges. The USD strength and additional tariff wars have clearly put the limelight on the fragile five, especially Turkey. The Turkish lira lost more than 30% during August and despite strong or perhaps better to say desperate political rhetoric, there is no clear or easy economic solution. Turbulence in the currency markets have an almost traditional knock on effect on economies with USD debt, and for us as convertible bond investors the emphasis is on Asia. Hong Kong s Hang Seng and China s CSI took another beating in August with losses of -2.4% and -5.2% respectively. Singapore is down -3.2% and only Taiwan can escape the downside trend with +0.1%. Europe also remains out of fashion with stronger profits being earned in the US. In Germany, the Dax is down - 3.5% bringing the year to date losses to a full -4.3%. France s CAC40 showed a loss of -1.9% for the month of August, Switzerland was down -2.2%, Spain -4.8% with Italy s stock market hit even harder with returns of -8.8%. Italy s finances are weak, its economy is not growing and its banking system suffers from a significant amount of non-performing loans. All that is not news, but the collapse of the Morandi bridge in Genoa and concerns over the upcoming September budget plans seemed to act as the catalysts to spook investors. Still, it was the significant market weight of US stocks that drove the MSCI World s +0.6% return for August. Convertible bonds as measured by the Thomson Reuters Global Focus Convertible Index gained 0.9% outperforming global equities. Our fund just slightly outperformed its benchmark. *Schroder International Selection Fund is referred to as Schroder ISF throughout this document 1

2 Portfolio Overview Marketing material for professional investors or advisers only Overall the fund remained conservatively positioned. The equity exposure of the fund remained under the 40% mark, in-line with the benchmark level. Combined with a consistent conservative credit exposure and a low effective duration of just above two years the portfolio is still positioned to provide a high amount of protection. In the US we have kept our underweight in equity exposure well below the benchmark. This is true for the simple weight in that region, but also for the risk exposure. Consistent with the longer term positioning we remain underweight to European convertible bonds in favour of Japan and to a lesser extent Asia ex Japan. Convertible valuations continued to cheapen with Japan and Asia remaining cheap regions to invest in. few months, we continue to be underweight in real estate and consumer names. The primary market for convertible bonds remained active in August and a total volume of $4.8bn of new paper came to the market. Again, the US was the most active region for new issues. Amongst others we participated in US healthcare issue Illumina and Japanese financial SBI. Finally, we invested in a convertible bond from Latin America. Mercadolibre issued a $880m bond with a 2028 maturity, The fund s running yield continues at around 0.5%. The portfolio s bond floor stands at a level of 84% while the overall credit rating of the fund stayed on a BBB average. At a sector level, we are now overweight to materials as well as information technology. Consistent with the last Outlook and Strategy We had already stated in the monthly fund updates earlier this year that the set-back had not sufficiently cleared the air and hence would not be surprised to see further headwinds from equity markets in coming months. We have not changed our mid-term opinion: The market shake up has not been sufficient to quell excessive optimism and market sentiment is still far from depressed. The market s attention has moved from concerns over tariffs to the frail state of the euro and back to tariffs. We were not surprised to see Italy as a main problem in the European currency zone. The triple deficit of government, target 2 overdraft and non-performing loans make Italy a very weak member of the Euro. Recent increases in the credit spread of Italian government bonds compared to German Bunds have lifted the average coupon payments for new government debt to 3.1% and hence roughly the average Italy is paying on its existing government debt. That may mark the turning point in the low interest rate period for Italy. New debt will become more costly. With all sound financial reason to be negative on Italy and the European currency we actually remain reasonably positive: for one thing, we do not think 2018 will see the break-up of the Euro. Of course, problems will not be solved this year either. Italy will demand more spending, the rating agencies will threaten or indeed impose a downgrade to below investment grade and the European Central Bank (ECB) will then be able to demand policy changes. In the end there will be a Greek-like rescue package but given the importance of Italy probably more a Greek-lite version with less stringent austerity demands. The combination of potential tariffs and a strong dollar have clearly focused the attention on emerging markets. Currency markets have reacted viciously with the Argentine peso, Turkish lira, South African rand and Brasilian real among those currencies devaluing. Equity markets have been hit too, with the MSCI Emerging Market down 7% since the start of the year. Over the last year we have applied a remarkably low level of equity and credit risk in comparison to the fund s history. We will continue to move the risk allocation of the fund by buying into the dips but overall remain with our conservative yet constructive approach. Our long-term objective remains to capture a large part of the equity upside and this is the overall theme which we have applied over the years. However, that does not mean simply having more risk exposure compared to the index or a simple overweight of equity exposure. On balance we still see the risk of a more meaningful repricing of risk assets and hence it seems reasonable to once more emphasise the protective qualities of convertible bonds. These include: Protection against equity set-backs due to the conversion right s optionality and the bond floor of the fixed income element. Protection against rising interest rates with a short to medium effective duration And, at least with the more defensive convertibles, good downside protection against suddenly widening credit spreads. We would not be surprised to see these demonstrated over the coming months. In case it turns out that we are *Schroder International Selection Fund is referred to as Schroder ISF throughout this document 2

3 too negative, we still have a decent 38% equity exposure in the fund to give us sufficient lift from the markets. losing on the downside may sound trivial, but it is a firm foundation for long-term success. One of the smartest parts in any investor s asset allocation is convexity. Gaining more on the upside than Risk Considerations The capital is not guaranteed. Non-investment grade securities will generally pay higher yields than more highly rated securities but will be subject to greater market, credit and default risk. A security issuer may not be able to meet its obligations to make timely payments of interest and principal. This will affect the credit rating of those securities. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. Investment in bonds and other debt instruments including related derivatives is subject to interest rate risk. The value of the fund may go down if interest rate rise and vice versa. It may be difficult to sell quickly positions of one or more companies to meet redemption requests upon demand in extreme market conditions. 3

4 Fund Data as at 31 August*** Team Portfolio managers Size & Holdings Fund size in base currency (USD) Dr. Peter Reinmuth Chris Richards, CFA bn Region Allocation Portfolio Index Europe 23.26% 33.43% Asia 20.08% 17.01% Japan 28.22% 14.61% Americas 25.90% 32.64% Others 1.74% 2.31% Number of issues 190 Cash 0.80% 0.00% Portfolio Statistics**** Equity Sensitivity 38.32% Delta 0.48 Bond Floor 84.38% Sector Allocation Portfolio Index Consumer Discretionary 14.41% 15.68% Consumer Staples 1.74% 3.41% Energy 2.56% 4.36% Average Rating Credit Spread BBB 142 bps Financials 7.56% 5.34% Health Care 8.87% 8.08% Yield 0.48% Effective Duration 2.10 years ***Source: Schroders as at 31 August Please note that the sector and country split follows the underlying equity rather than the issuer. ****Average credit quality is based on official ratings where available and implied ratings. Yield is estimated on a running yield basis. Industrials 16.29% 12.80% Information Technology 26.49% 21.86% Materials 15.27% 8.80% Real Estate 3.30% 9.58% Telecommunication Services 0.00% 5.12% Utilities 2.74% 4.96% Cash 0.80% 0.00% 4

5 Credit Rating Equity Exposure AAA 0.27% 0-20% 27.40% 31.50% AA A BBB 0.29% 30.46% 30.08% 33.85% 27.85% 20-40% 40-60% 17.38% 27.08% 26.24% 25.48% BB B CCC and below 6.02% 0.83% 13.58% 29.67% 27.10% 60-80% % 14.70% 16.07% 5.34% 8.81% Thomson Reuters Global Focus Convertible Bond Index Thomson Reuters Global Focus Convertible Bond Index Top Ten Issues Holding Portfolio Sector 1 DEUTSCHE POST AG CONV REGS.05% 30 JUN % Industrials 2 SONY CORP CONV REGS 0% 30 SEP % Consumer Discretionary 3 TWITTER INC CONV 144A.25% 15 JUN % Information Technology 4 SIEMENS FINANCIERINGS CONV REGS 1.65% 16 AUG % Industrials 5 PALO ALTO NETWORKS CONV 144A.75% 01 JUL % Information Technology 6 ROYAL GOLD INC CONV 2.875% 15 JUN % Materials 7 MICROCHIP TECHNOLOGY INC CONV 1.625% 15 FEB % Information Technology 8 BAYER AG CONV REGS.05% 15 JUN % Materials 9 AKAMAI TECHNOLOGIES INC CONV144A.125% 01 MAY % Information Technology 10 HARVEST INTERNATIONAL CO CONV REGS 0% 21 NOV % Consumer Discretionary Source: Schroders as at 31 August Important Information: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the Company ). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Europe) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has expressed its own views and opinions in this document and these may change. Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at or on request should you not have access to this webpage. Schroders has expressed its own views and opinions in this document and these may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No England. Authorised and regulated by the Financial Conduct Authority. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or contains additional disclaimers which apply to the third party data. 5