Interim Report. Standard Life Investment Company III. Interim Report & Financial Statements For the six months ended 31 December 2017 (unaudited)

Transcription

1 Interim Report Standard Life Investment Company III For the six months ended 31 December 2017 (unaudited)

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3 Contents 1 Company Information* 2 Authorised Corporate Director s Report* 3 Statement of Authorised Corporate Director s Responsibilities 4 The Registrar of the Company 5 Investment Report* Investments Review*, Portfolio Statement* and Sub-fund Financial Statements 9 Enhanced-Diversification Growth Fund 24 MyFolio Managed I Fund 33 MyFolio Managed II Fund 43 MyFolio Managed III Fund 53 MyFolio Managed IV Fund 62 MyFolio Managed V Fund 71 MyFolio Market I Fund 80 MyFolio Market II Fund 90 MyFolio Market III Fund 100 MyFolio Market IV Fund 109 MyFolio Market V Fund 117 MyFolio Multi-Manager I Fund 126 MyFolio Multi-Manager II Fund 135 MyFolio Multi-Manager III Fund 145 MyFolio Multi-Manager IV Fund 154 MyFolio Multi-Manager V Fund 163 MyFolio Managed Income I Fund 177 MyFolio Managed Income II Fund 192 MyFolio Managed Income III Fund 207 MyFolio Managed Income IV Fund 222 MyFolio Managed Income V Fund 236 MyFolio Multi-Manager Income I Fund 250 MyFolio Multi-Manager Income II Fund 265 MyFolio Multi-Manager Income III Fund 280 MyFolio Multi-Manager Income IV Fund 295 MyFolio Multi-Manager Income V Fund 310 Further Information 312 Alternative Investment Fund Disclosures 314 Securities Financing Transactions Disclosure * Collectively, these items comprise the Authorised Corporate Director s Report for the purposes of the rules contained in the Collective Investment Schemes Sourcebook ( the Sourcebook ).

4 Company Information We are pleased to enclose the interim report and accounts for the SLIC OEIC III umbrella, which contains 26 sub-funds including 25 under the MyFolio brand. Market background Global equities delivered strong performance during the review period. Many indices reached record highs, propelled by improving prospects for the global economy and robust corporate earnings growth. Against this backdrop, central banks indicated their intention to gradually tighten monetary policy. Indeed, in November, the Bank of England raised UK interest rates for the first time in over 10 years. In December, the US Federal Reserve delivered its third rate hike of Meanwhile, the European Central Bank announced plans to start downsizing its quantitative easing programme. Towards the end of the year, President Trump signed his $1.5 trillion tax-cut package into law, providing added impetus to markets. Politics remained to the fore, including a narrow vote for independence in Catalonia (rejected by the Spanish government) and a landslide election victory for Japan s Prime Minister Abe. In Europe, Brexit talks progressed to the second phase after the UK and EU struck a last-minute deal. The price of oil and other commodities continued to track higher. For a more in-depth look at markets, please read the enclosed global overview and outlook. Fund news Against this market backdrop, the MyFolio fund range continued to benefit from its broad mix of defensive assets (such as cash and bonds) and growth assets (such as equities and real estate), in order to reward investors for the level of risk taken. Our success in achieving this over the long term means that investors now trust us to manage 12.6 billion in MyFolio assets (at 30 September 2017). Meanwhile, the Enhanced-Diversification Growth Fund (EDGF) delivered positive returns over the last six months, albeit behind global equities. However, EDGF did exhibit volatility that was less than two-thirds that of global equities, in line with its objective. Finally, I would like to personally thank you for choosing to invest with us and we look forward to your continued support. If you would like any further information, please visit Jacqueline Lowe Head of UK Wholesale Cautionary note You should remember that past performance is not a guide to future performance. The value of investments may go down as well as up and, therefore, you may not get back the amount originally invested. Standard Life Investment Company III Head Office Director Authorised Corporate Director (ACD) Board of Directors of the ACD Secretary of the ACD 1 George Street Edinburgh EH2 2LL The Authorised Corporate Director (ACD) is Standard Life Investments (Mutual Funds) Limited which is the sole director and is authorised and regulated by the Financial Conduct Authority for investment business Standard Life Investments (Mutual Funds) Limited Registered Office 1 George Street Edinburgh EH2 2LL A S Acheson S Campbell S A Fitzgerald J Lowe L Scott D E Thomas S Wemyss H.S. Kidd Depositary Independent Auditors Registrar Investment Advisers Citibank Europe plc UK Branch 1 North Wall Quay Dublin 1 KPMG LLP 15 Canada Square Canary Wharf London E14 5GL Standard Life Investments (Mutual Funds) Limited 1 George Street Edinburgh EH2 2LL Standard Life Investments Limited 1 George Street Edinburgh EH2 2LL Merger of Aberdeen Asset Management and Standard Life Prior to the 14 August 2017, the manager Standard Life Investments (Mutual Funds) Limited and the Investment Adviser, Standard Life Investments Limited, were subsidiaries of Standard Life Plc. On 14 August 2017, Standard Life Plc and Aberdeen Asset Management Plc, completed a merger to form Standard Life Aberdeen Plc. 1 Standard Life Investment Company III

5 Authorised Corporate Director s Report The Authorised Corporate Director (ACD) is Standard Life Investments (Mutual Funds) Limited which is the sole director, authorised and regulated by the Financial Conduct Authority, for investment business. Standard Life Investment Company III ("the Company") is an Open- Ended Investment Company with variable capital under Regulation 12 (Authorisation) of the Open-Ended Investment Companies Regulations 2001 and the shareholders are not liable for the debts of the Company. Standard Life Investment Company III is structured as an umbrella company. Each Fund has the investment powers equivalent to those of a securities company. The following items within each Fund report form part of the Authorised Corporate Director's report; Investment Report, Portfolio Statement, Ongoing Charges Figure, Comparative Tables and Treatment by Corporate Shareholders. Distributions are made from positive net revenue where gross revenue exceeds expenses and tax. The total return consists of investment and currency gains and losses in addition to net revenue. In situations where Funds have a negative total return but a positive net revenue position, there will be a distribution. Names and addresses of the ACD, Registrar, Investment Adviser and Auditors are contained on page 2 of the Annual Report and Financial Statements. The investment objectives of each Fund, how they were achieved and investment activities during the year are disclosed within the individual Funds' reports. Copies of the most recent Prospectus are available online at standardlifeinvestments.com, by writing to our Edinburgh address or by calling (+44 (0) if outwith the UK). I hereby certify the Annual Report and Financial Statements on behalf of the Directors of Standard Life Investments (Mutual Funds) Limited. I hereby certify the Interim Report and Financial Statements on behalf of the Directors of Standard Life Investments (Mutual Funds) Limited. Director Standard Life Investments (Mutual Funds) Limited 27 February 2018 Material differences may arise between a Fund's net revenue after tax and its distribution if the ACD's periodic charge and transaction costs are borne by the capital property of the Fund for distribution purposes. The expenses in the Statement of Total Return includes these expenses even if they are met from the capital property of the Fund. In such cases, the amount a Fund has to distribute will exceed its net revenue and this is detailed in the notes to the financial statements where it occurs. Standard Life Investment Company III 2

6 Statement of Authorised Corporate Director s Responsibilities The Open-Ended Investment Companies Regulations 2001 and the rules contained in the Collective Investment Schemes ourcebook require the ACD to prepare financial statements for each annual and half-yearly accounting year which give a true and fair view of the financial position of the Company and of its net revenue and net gains on the property of the Company for the year and to lay copies of the annual report before the Company in a general In preparing the financial statements the ACD is required to: select suitable accounting policies then apply them consistently; comply with the disclosure requirements of the Statement of Recommended Practice for the Financial Statements of Authorised Funds issued by the Investment Management Association in May 2014; follow generally accepted accounting principles and applicable accounting standards; make judgements and estimates which are reasonable and prudent; keep proper accounting records, which enable it to demonstrate that the Report and Financial Statements, as prepared, comply with the above requirements; and prepare the financial statements on a going concern basis unless it is inappropriate to presume that the scheme will continue in operation. The ACD is responsible for the management of the Company in accordance with the Instrument of Incorporation, Prospectus and the Regulations and for taking reasonable steps for the prevention and detection of fraud and other The Directors of Standard Life Investments Limited are responsible for the maintenance of Standard Life Investments Limited website. The ACD confirms that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the financial statements for the year ended 31 December The ACD also confirms that applicable accounting standards have been followed and that the financial statements have been prepared on a going concern basis. 3 Standard Life Investment Company III

7 The Registrar of the Company The Authorised Corporate Director (ACD) is the Registrar of the Standard Life Investment Company III. The ACD has delegated certain aspects of the registrar s operational duties to DST Financial Services International Limited ( DST Limited ). Prior to 14 August 2017, DST Limited were known as International Financial Data Services Limited ( IFDS Limited ). The Registrar is responsible to the Depositary for the maintenance of a register of shareholders in the Company. The register can be inspected free of charge at the offices of DST Limited at DST House, St Nicholas Lane, Basildon, Essex, SS15 5FS. Standard Life Investment Company III 4

8 Investment Report MyFolio Global Overview: six months to 31 December 2017 Market themes UK direct real estate Equities UK commercial real estate recorded positive returns. Global equity markets delivered positive returns over the last six months. Capital values strengthened, recovering losses incurred after the EU referendum. Progressive economic data and corporate earnings newsflow helped sentiment. President Trump s tax-cut package boosted equities at the end of the year. Global equity markets achieved positive returns during the review period, with several major indices hitting record highs. The improving global economy, robust corporate profits and fluctuating commodity prices dictated sentiment. Politics also played a large part, notably ongoing negotiations around the UK s exit from the EU, elections in Europe (the Spanish government rejected a Catalan bid for independence) and Japanese Prime Minister Abe s overwhelming win in a snap election. As a consequence of the increasingly positive global growth outlook, several central banks are now gradually reducing their monetary support programmes. For example, the Bank of England (BoE) raised UK interest rates in November, while the US Federal Reserve raised rates three times during Elsewhere, the European Central Bank (ECB) announced it would start tapering its quantitative easing programme. Finally, President Trump passed his much-vaunted $1.3 trillion tax-cut plan at the close of the year, giving one final boost to equity markets. Fixed income Demand for corporate bonds was robust, boosted latterly by ECB support. Changing interest rate expectations affected sentiment towards government bonds. Inflationary pressures led to interest rate rises in the UK and US. Corporate bonds generally made progress over the last six months, supported by an improving economic backdrop that engendered a more optimistic outlook. Central banks and the prospects for changes in monetary policy also preoccupied investors. Policymakers in the US, UK and, less so, Europe moved to tighten policy as the year progressed but corporate bonds still posted positive returns. Sufficient progress being made in Brexit negotiations provided a further boost to risk assets (corporate bonds included) in the last weeks of December. Signs that central bankers were prepared to take a pre-emptive stance on inflation and review ultra-accommodative monetary policy also affected government bond markets, which were unable to sustain extremely low yield levels amid continued and progressive tightening indications. Having raised rates for the first time in 10 years, the BoE subsequently reiterated its cautious outlook for the UK economy, dampening expectations for another rate hike (which was positive for government bonds). The ECB s announcement that it would reduce its bond-buying programme more gradually than expected also helped sentiment. Industrials were the best-performing sector, while retail struggled. UK commercial real estate delivered positive performance during the period and returns for 2017 as a whole were better than many analysts originally anticipated. Supported by a relatively robust domestic economy, UK real estate recorded a total return of 11.2% per annum for the year to end-december. Having suffered in the aftermath of the EU referendum, capital values turned positive early in 2017 and subsequently continued to rise. Income returns were also solid, supported by robust occupational demand. In sector terms, industrials were the strongest performers, supported by favourable supply/demand dynamics, as well as the structural shift to online retailing. There was some improvement in sentiment towards the retail sector although it remained under pressure. The bankruptcy of Toys R Us in the US served as a reminder of the threat to traditional bricks & mortar retailers from internet shopping. In addition, Debenhams share price tumbled by 20% in early-january when it issued a surprise profit warning because of poor sales during the festive period. Market outlook Equities Global equity markets enter 2018 on a sound footing. The world economy is growing at a robust rate, which is feeding into healthy corporate profits. Central banks have started to withdraw monetary stimulus, although any future moves will be measured and datadependent. Challenges remain, notably around geopolitics, the US debt ceiling and potential policy missteps. China could also slow more sharply than expected. Nonetheless, the overall the outlook is encouraging. Fixed income The outlook for bonds is generally less positive. Despite this, there is enough uncertainty to make it unlikely that government bonds will fall in value significantly. Valuations in some parts of the corporate bond market are a little stretched. However, we believe that the fairly benign macroeconomic environment should provide support. UK direct real estate UK real estate dynamics remain supportive, although we expect returns to moderate as the economy experiences weaker growth in Although Brexit negotiations progressed at the end of 2017, the full economic impact remains unknown and this will continue to affect sentiment towards UK commercial real estate. Despite this uncertainty, we expect real estate to remain attractive to investors seeking a source of sustainable income. 5 Standard Life Investment Company III

9 Investment Report (Continued) MyFolio Activity Statement Strategic Asset Allocation We decide upon and review the Strategic Asset Allocation (SAA) benchmark for all the funds each quarter. In doing so, we consult with Moody s Analytics, world-leading experts in financial risk modelling, to establish the optimum strategic asset allocation for each fund. Investors should note that Moody s Analytics have not modelled the absolute return exposure within the Multi-Manager Funds. This is a matter of judgement. We have therefore elected to replace a portion of the growth and defensive assets with absolute return components. We made no changes to the SAA over this review period. Market Funds I II III IV V Money Market including Cash 7.20% 1.00% 1.00% 1.00% 1.00% UK Government Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Short Dated UK Gov t Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Global Index Linked Bonds 7.00% 7.10% 3.90% 1.00% 0.00% Short Dated Global IL Bonds 7.00% 7.10% 3.90% 1.00% 0.00% Sterling Corporate Bonds 17.60% 11.30% 5.10% 1.70% 0.00% Short Dtd Sterling Corp Bonds 17.60% 11.30% 5.10% 1.70% 0.00% Global Corporate Bonds 11.30% 9.50% 7.50% 2.60% 2.00% Short Dated Global Corp Bonds 3.80% 3.20% 2.50% 0.90% 0.00% Absolute Return Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Defensive Assets 71.50% 50.50% 29.00% 9.90% 3.00% UK Equities 6.90% 12.70% 18.10% 24.30% 31.90% US Equities 6.20% 11.40% 16.30% 21.80% 28.80% European Equities 2.70% 5.00% 7.20% 9.50% 12.70% Japanese Equities 2.00% 3.60% 5.20% 6.90% 9.20% Asia Pacific Equities 1.60% 2.80% 4.10% 5.40% 7.20% Emerging Market Equities 1.60% 2.80% 4.10% 5.40% 7.20% Global High Yield Bonds 2.50% 2.50% 3.50% 4.50% 0.00% Emerging Mkt Local Curr Bonds 0.70% 1.20% 1.80% 2.20% 0.00% UK Real Estate 3.20% 5.60% 8.00% 7.60% 0.00% Global REITs 1.10% 1.90% 2.70% 2.50% 0.00% Multi-Asset Absolute Returns 0.00% 0.00% 0.00% 0.00% 0.00% Growth Assets 28.50% 49.50% 71.00% 90.10% 97.00% Total % % % % % Standard Life Investment Company III 6

10 Investment Report (Continued) MyFolio Activity Statement Managed Funds and Multi-Manager Funds I II III IV V Money Market including Cash 5.80% 1.00% 1.00% 1.00% 1.00% UK Government Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Short Dated UK Gov t Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Global Index Linked Bonds 5.50% 5.60% 3.00% 0.70% 0.00% Short Dated Global IL Bonds 5.50% 5.60% 3.00% 0.70% 0.00% Sterling Corporate Bonds 14.10% 9.00% 4.10% 1.40% 0.00% Short Dtd Sterling Corp Bonds 14.10% 9.00% 4.10% 1.40% 0.00% Global Corporate Bonds 9.00% 7.60% 5.90% 2.00% 2.00% Short Dated Global Corp Bonds 3.00% 2.60% 2.00% 0.70% 0.00% Absolute Return Bonds 14.30% 10.10% 5.80% 2.00% 0.00% Defensive Assets 71.30% 50.50% 28.90% 9.90% 3.00% UK Equities 5.50% 10.20% 14.50% 19.50% 25.40% US Equities 5.00% 9.10% 13.00% 17.40% 23.00% European Equities 2.20% 4.00% 5.80% 7.60% 10.20% Japanese Equities 1.60% 2.90% 4.20% 5.50% 7.40% Asia Pacific Equities 1.30% 2.20% 3.30% 4.30% 5.80% Emerging Market Equities 1.30% 2.20% 3.30% 4.30% 5.80% Global High Yield Bonds 2.00% 2.00% 2.80% 3.60% 0.00% Emerging Mkt Local Curr Bonds 0.60% 1.00% 1.40% 1.80% 0.00% UK Real Estate 2.60% 4.50% 6.40% 6.10% 0.00% Global REITs 0.90% 1.50% 2.20% 2.00% 0.00% Multi-Asset Absolute Returns 5.70% 9.90% 14.20% 18.00% 19.40% Growth Assets 28.70% 49.50% 71.10% 90.10% 97.00% Total % % % % % Managed Income Funds and Multi-Manager Income Funds I II III IV V Money Market including Cash 6.30% 1.00% 1.00% 1.00% 1.00% UK Government Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Short Dated UK Gov t Bonds 0.00% 0.00% 0.00% 0.00% 0.00% Global Index Linked Bonds 6.30% 6.20% 2.70% 0.90% 0.00% Short Dated Global IL Bonds 6.30% 6.20% 2.70% 0.90% 0.00% Sterling Corporate Bonds 15.50% 7.90% 3.70% 1.50% 0.00% Short Dtd Sterling Corp Bonds 15.50% 7.90% 3.70% 1.50% 0.00% Global Corporate Bonds 10.00% 11.80% 5.40% 2.20% 2.00% Short Dated Global Corp Bonds 3.30% 4.00% 1.80% 0.80% 0.00% Absolute Return Bonds 7.00% 5.00% 2.30% 1.00% 0.00% Defensive Assets 70.20% 50.00% 23.30% 9.80% 3.00% UK Equities 5.20% 9.90% 13.20% 19.40% 25.40% US Equities 4.60% 8.90% 11.80% 17.40% 23.00% European Equities 2.00% 3.90% 5.20% 7.60% 10.20% Japanese Equities 1.40% 2.90% 3.80% 5.50% 7.40% Asia Pacific Equities 1.10% 2.20% 3.00% 4.30% 5.80% Emerging Market Equities 1.10% 2.20% 3.00% 4.30% 5.80% Global High Yield Bonds 2.40% 4.00% 6.20% 3.60% 0.00% Emerging Mkt Local Curr Bonds 1.20% 2.00% 3.00% 1.80% 0.00% UK Real Estate 3.60% 3.00% 9.20% 6.20% 0.00% Global REITs 1.20% 1.00% 3.00% 2.10% 0.00% Multi-Asset Absolute Returns 6.00% 10.00% 15.30% 18.00% 19.40% Growth Assets 29.80% 50.00% 76.70% 90.20% 97.00% Total % % % % % 7 Standard Life Investment Company III

11 Investment Report (Continued) MyFolio Activity Statement Tactical Asset Allocation During the period, we made changes to our Tactical Asset Allocation (TAA) positions. We began 2017 with overweight positions (versus the SAA) in the US and in global real estate investment trusts (REITs), positioning the portfolios to benefit from a strong US economic recovery. US stocks then become more expensive, as the market had captured much of the upside, so we took the opportunity to modestly trim our overweight position. Despite the relatively high income of global REITs, they looked less appealing, with more interest rate hikes looming. Instead, we chose to allocate to other equity markets such as Europe and Japan where we believed that growth momentum was more favourable. Meanwhile, the UK continued to face headwinds after the signing of Article 50 and the portfolios remained underweight in UK equities. We then increased the level of risk in the portfolios through an increased overall allocation to equities, as we saw a sustained upturn in global economic growth. Benign inflation supported this, driven partly by weaker commodity pricing. The portfolios were slightly underweight bonds and other defensive assets in order to allocate to global equities, which we expected to outperform. Central banks, notably the US Federal Reserve (Fed), had already begun to look through the weaker economic data and focused on bringing monetary policy back to normal levels. Looking ahead, we expect global economic growth to continue its path upwards. President Trump s economic policies have been harder to implement than expected, which has allowed the Fed to favour a gradual policy of interest rate rises. Europe is also releasing strong economic data, which should benefit our slightly increased focus on growth assets, such as equities. Not all the MyFolio funds invest in every asset class. Therefore, the tactical asset allocation overweight and underweight positions listed above may not apply to some funds. Cautionary note You should remember that past performance is not a guide to future performance. The value of investments may go down as well as up. Therefore, you may not get back the amount originally invested. Standard Life Investment Company III 8

12 Enhanced Diversification Growth Fund Investment Report Sub Header Fund Information Fund Manager Investment objective The Sub-fund aims to provide a long term total return through capital appreciation and income by investing in a diversified portfolio of assets. Investment policy The policy of the Sub-fund is to invest in collective investment schemes, permitted derivative contracts (including futures, options, swaps, swaptions, forward currency contracts and other derivatives), equities, equity type investments, fixed interest securities, deposits, money market instruments, cash and near cash in such proportions as the Investment Adviser may from time to time determine. This may mean that at any time the Sub-fund may have a large exposure to collective investment schemes. Equity type investments will include convertible stocks, stock exchange listed warrants, depositary receipts and any other such investments which entitle the holder to subscribe for or convert into the equity of the company and / or where the share price performance is, in the opinion of the ACD, influenced significantly by the stock market performance of the company s ordinary shares. The Sub-fund may, subject to and in accordance with the FCA Rules, take long and short positions in markets, securitiesand groups of securities through derivative contracts. Risk Multi Asset Investing Team Launch Date 20 November 2013 The Sub-fund is intended for investors who wish to participate in the potential growth opportunities over the medium to longer term afforded by investing in a portfolio consisting of collective investment schemes, derivatives, transferable securities, immovable property, deposits, cash and near cash. The diversified nature of the portfolio makes it suitable for investors wishing to achieve a broad spread of exposure. The investor must be able to accept temporary capital losses due to the potentially volatile nature of the assets held and should therefore have an investment time horizon of at least 5 years. Environment Global equities delivered strong performance during the review period. Many indices reached record highs, propelled by improving prospects for the global economy and robust corporate earnings growth. Against this backdrop, central banks indicated their intention to gradually tighten monetary policy. Indeed, in November, the Bank of England raised UK rates for the first time in over 10 years while, in December, the US Federal Reserve made its third rate hike of Meanwhile, the European Central Bank (ECB) announced plans to start downsizing its quantitative easing programme. Towards the end of 2017, US President Trump signed his much-vaunted $1.5 trillion tax-cut package into law, providing added impetus to markets. Politics remained to the fore, including a narrow vote for independence in Catalonia (rejected by the Spanish government) and a landslide election victory for Japan s Prime Minister Abe. In Europe, Brexit talks progressed to the second phase after the UK and EU struck a last-minute deal. The price of oil and other commodities continued to track higher. Activity Seeking to benefit from the improving economic environment in Europe, we opened a position preferring European banks over the broader European equity market. We closed our European versus Japanese interest rates strategy where upside potential appeared limited given recent developments in the Eurozone. We also closed our short US interest rates position designed to benefit from rising bond yields, in light of below-forecast inflation figures and doubts over the US government s ability to enact reforms. We opened a position favouring the Swedish krona over the Swiss franc. The franc looks overvalued on a number of metrics and, given improving economic growth prospects in Sweden, we expect the krona to appreciate against the franc over the medium term. We introduced a new interest rates strategy expressing our views on rates in Canada and Sweden. This aims to generate returns from the relative changes between long and shorter-dated bonds of the two countries, while also enhancing portfolio diversification. We added a US versus UK real yields position, predicated on our view that inflation expectations in the US and UK will converge over the medium term. We also opened a US real yields versus Japanese government bonds strategy. This should provide diversification benefits in the event that US inflation surprises on the upside and global central banks reduce liquidity faster than markets expect. Elsewhere, after closing our Japanese equity strategy in October following strong performance, we reinstated the position in November, as the market had retreated to appealing levels. We added some Korean equity exposure, looking to benefit from the ongoing export-led recovery in global growth. We subsequently opened an equity strategy that seeks to gain exposure to information technology companies in emerging markets (EM). Finally, we closed our strategies designed to benefit from lower interest rates in the UK and Australia after both met our return expectations. 9 Standard Life Investment Company III

13 Enhanced Diversification Growth Fund Investment Report (Continued) Performance Over the 6-month period, EDGF returned 7.68% (gross of fees). The Fund has no formal performance benchmark but a global equity portfolio that had been hedged against currency risk (MSCI AC World, hedged to ) would have returned 9.70% over the same period, as an indicator of global investment conditions. It should be noted that EDGF has only 2/3rds the volatility of equity markets. The Fund s design means that while it targets a return similar to global equities over a full market cycle (generally five-to-seven years) it will typically underperform when equity markets are very strong, as has been the case over the review period. Market risk strategies With the robust performance of global equities during the review period, our equity market exposures were the largest driver of positive returns, with our global, US and European equity strategies among the top performers. Our high-yield credit strategy also gained, with credit fundamentals supported by robust corporate earnings results and hopes of US tax reform. Also positive was our EM debt strategy, as EM assets found support from US dollar weakness and brightening economic growth prospects. Enhanced Diversifiers During the first half of the review period, our preference for the US dollar over the Canadian dollar was penalised. The Canadian dollar appreciated after the Bank of Canada unexpectedly raised interest rates. Moreover, stronger-than-expected domestic growth argued for further rate hikes. Towards year-end, Canadian short-term interest rates tracked higher, following the release of aboveforecast inflation data. This proved negative for our position seeking to benefit from relative movements in Canadian and Swedish rates. At the same time, the Canadian dollar gained ground as oil prices recovered, hurting our position preferring the Japanese yen over the Canadian dollar. After their strong performance earlier in the period, global sovereign bonds retreated in September, as central banks indicated they were preparing to reduce monetary support. As a result, our Australian interest rates exposure contributed negatively. During the final three months of 2017, our position expressing the view that the European banking sector will outperform leading European blue-chip companies detracted from performance. The banks trailed larger companies following the political crisis in Spain and indications that the ECB would adopt modest monetary policy tightening. Elsewhere, our currency pairs aiming to profit from weakness in the Korean won dragged on returns. The won was buoyed by the weakness in the US dollar, continued export-led economic growth and demand for local equities from yield-seeking investors. Outlook Our central expectation is for continued modest broad-based global growth, albeit with regional variations. Fiscal policy and the changing monetary policies of central banks will be important drivers of asset returns, especially as the pace of change in policies remains uncertain. The US is moving to a tighter monetary environment, albeit on a gradual incline. Improving data in Europe may reduce the ECB s appetite for monetary easing. However, it will likely remain cautious in the near term given the elevated levels of uncertainty around the process of the UK s withdrawal from the European Union. Japan, meanwhile, is likely to remain on a loose monetary path. Geopolitical tensions remain elevated and, on many metrics, asset prices look expensive. We will seek to exploit the opportunities that these conditions present by implementing a diversified range of strategies using multiple asset classes. Synthetic Risk & Reward Indicator Lower risk Typically lower rewards This indicator reflects the volatility of the Sub-fund s share price over the last five years which in turn reflects the volatility of the underlying assets in which the Sub-fund invests. Historical data may not be a reliable indication of the future. As the Sub-fund does not have a five year price history, we have used an internally produced bespoke blended benchmark to show how the Sub-fund price may have behaved over the period prior to launch. The current rating, which is the same for all unit classes, is not guaranteed and may change if the volatility of the assets in which the Sub-fund invests changes. The lowest rating does not mean risk free. All investment involves risk. This Sub-fund offers no guarantee against loss or that the Sub-fund s objective will be attained. For further information on the risks that may not be fully captured by the risk and reward indicator, please refer to the current Key Investor Information Document (KIID). Cautionary note Higher risk Typically Higher rewards It should be remembered that past performance is not a guide to future performance. The value of investments may go down as well as up and, therefore, investors may not get back the amount originally invested. Standard Life Investment Company III 10

14 Enhanced Diversification Growth Fund Comparative Tables 31 December June June June 2015 pence per share pence per share pence per share pence per share Retail accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.35) 6.28 Operating charges** (0.32) (0.60) (0.61) (0.64) Return after operating charges* (1.96) 5.64 Distributions (0.38) (0.32) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 7.75% 5.40% -3.40% 10.84% Other information Closing net asset value ( 000) Closing number of shares 268, , , ,918 Operating charges**** 1.03% 1.03% 1.06% 1.15% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. 11 Standard Life Investment Company III

15 Enhanced Diversification Growth Fund Comparative Tables (Continued) 31 December June June June 2015 pence per share pence per share pence per share pence per share Standard Life accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.45) 6.15 Operating charges** (0.03) (0.06) (0.08) (0.13) Return after operating charges* (1.53) 6.02 Distributions 0.00 (0.22) (0.81) (0.64) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 8.16% 6.20% -2.67% 11.72% Other information Closing net asset value ( 000) 2,872 2,673 1, Closing number of shares 4,476,659 4,507,757 2,654, ,697 Operating charges**** 0.11% 0.11% 0.14% 0.23% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. Standard Life Investment Company III 12

16 Enhanced Diversification Growth Fund Comparative Tables (Continued) 31 December June June June 2015 pence per share pence per share pence per share pence per share Standard Life B accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.47) 6.25 Operating charges** Return after operating charges* (1.47) 6.25 Distributions 0.00 (0.28) (0.89) (0.73) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 8.22% 6.25% -2.51% 11.94% Other information Closing net asset value ( 000) 129, ,033 69,233 11,724 Closing number of shares 197,171, ,406, ,172,826 20,002,000 Operating charges**** 0.00% 0.00% 0.00% 0.00% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. 13 Standard Life Investment Company III

17 Enhanced Diversification Growth Fund Comparative Tables (Continued) 31 December June June June 2015 pence per share pence per share pence per share pence per share Platform 1 accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.36) 6.34 Operating charges** (0.25) (0.47) (0.48) (0.52) Return after operating charges* (1.84) 5.82 Distributions (0.49) (0.38) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 7.85% 5.51% -3.18% 11.18% Other information Closing net asset value ( 000) , Closing number of shares 1,022, ,700 2,072, ,025 Operating charges**** 0.81% 0.81% 0.84% 0.93% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. Standard Life Investment Company III 14

18 Enhanced Diversification Growth Fund Comparative Tables (Continued) 31 December June June June 2015 pence per share pence per share pence per share pence per share Platform fixed accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.39) 6.31 Operating charges** (0.20) (0.38) (0.38) (0.36) Return after operating charges* (1.77) 5.95 Distributions (0.55) (0.44) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 7.92% 5.64% -3.04% 11.40% Other information Closing net asset value ( 000) 1,405 1,190 1, Closing number of shares 2,186,115 1,997,290 2,670,486 22,000 Operating charges**** 0.65% 0.65% 0.65% 0.65% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. 15 Standard Life Investment Company III

19 Enhanced Diversification Growth Fund Comparative Tables (Continued) 31 December June June June 2015 pence per share pence per share pence per share pence per share Institutional fixed accumulation Change in net assets per share Opening net asset value per share Return before operating charges* (1.42) 6.33 Operating charges** (0.16) (0.30) (0.29) (0.28) Return after operating charges* (1.71) 6.05 Distributions 0.00 (0.04) (0.65) (0.53) Retained distributions on accumulation share Closing net asset value per share * after direct transaction costs of: *** Performance + Return after charges 8.00% 5.89% -2.93% 11.58% Other information Closing net asset value ( 000) 120, ,886 37,103 23,615 Closing number of shares 186,661, ,818,843 65,590,339 40,517,503 Operating charges**** 0.50% 0.50% 0.50% 0.50% Direct transaction costs*** 0.00% 0.00% 0.00% 0.00% Prices ++ Highest share price Lowest share price ** The operating charges include all costs borne by the Sub-fund, except for direct transaction costs. *** The direct transaction costs are made up of; fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges as well as transfer taxes and duties. In line with the requirements of the 2014 SORP for authorised funds, direct transaction costs are stated after the proportion of the amounts collected from dilution adjustments in relation to direct transaction costs. Direct transaction costs, where expressed as a percentage of average NAV, reflect an equivalent annual period. **** The operating charges percentage is the equivalent of the ongoing charges figure per the prior year accounts. It shows the annualised operating expenses of the share class as a percentage of the average net asset value of the class over the same period. + The performance figures are calculated by taking the value of the shareclass per the financial statements compared to the value per the financial statements in the prior year. This figure may differ from the performance figure quoted in the Investment Report. The Investment Report performance figure is calculated using the last available published price for a given shareclass in the period compared to the equivalent for the prior period. The published price may contain an adjustment for dilution in accordance with the Sub-fund pricing policy, while the price per the financial statements values the Sub-fund on a bid-price basis. The financial statements shareclass valuation is based on close of business market prices on the last day of the period, again this may differ from the intra-day pricing point of the Sub-fund which is used in the published shareclass price. ++ These represent the highest and lowest share prices available to investors in the period. This may differ to the opening and closing net asset value per share in the table above due to accounting adjustments. Standard Life Investment Company III 16