Schroder ISF Asian Convertible Bond. Monthly Newsletter. Market Overview. Historical performance USD hedged

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1 Schroder ISF* Asian Convertible Bond Monthly Newsletter Market Overview Performance %** USD EUR CHF Nov year 3 years (p.a.) 5 years (p.a.) I class 1.42% -1.29% 3.31% 4.32% A class 1.29% -2.81% 1.70% 2.68% BM 0.80% -0.79% 3.16% 3.77% I class 1.09% -3.99% 1.32% 3.09% A class 0.96% -5.47% -0.25% 1.48% BM 0.57% -3.20% 1.47% 2.70% C class 1.05% -5.30% -0.13% 1.55% A class 1.01% -5.81% -0.68% 0.97% BM 0.54% -3.54% 1.05% 2.25% **Euro hedged, CHF hedged and USD A and I share classes shown net of fees (where applicable), bid to bid. Source: Bloomberg, Schroders as at 30 November Portfolio data sourced from Schroders (unaudited). Benchmark: Thomson Reuters Asia ex Japan Convertible Bond Index (hedged for EUR/CHF). Historical performance USD hedged (%)** Fund (A Acc) Fund (I Acc) Benchmark % 10.9% 7.9% % 2.2% 3.1% After black October on global stock markets, November saw a number of markets bounce back from the lows, particularly the major US indices. It still needs to be seen if this was a mere dead cat bounce or indeed a bottoming out and perhaps even a seasonal into-year-end rally. Asian stock market benefitted from the tailwind from the US with the dollar (trade-weighted) index little changed over the month. Moreover, the G20 summit was generally seen as positive for emerging markets but specifically for China. China has been in a bear market since the US announced tariffs. Any hint that trade wars between China and the US are calming down can now re-spark investor confidence in this region. On the other hand, any renewed escalation can send Chinese stocks down even further. For the moment, stock markets are up. Hong Kong put in a fast lap with a monthly Hang Seng return of +6.1%. China s CSI300 was up 0.6%, Taiwan up only 0.9%, but Singapore showed a more solid increase of +3.3%. The overall MSCI Asia ex Japan gained 4.9% in November. Asian convertible bonds as measured by the Thomson Reuters Asia ex Japan convertible index finished the month with a plus of 0.8% in USD terms. Our fund outperformed its benchmark % 8.0% 6.8% % 3.1% 2.9% % 5.5% 4.4% ** A and I share classes shown net of fees (where applicable), bid to bid, USD returns. Source: Bloomberg, Schroders as at 30/12/2017. Benchmark: Thomson Reuters Asia ex Japan Convertible Bond Index (USD hedged). 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. 1

2 Portfolio Overview In line with the last few months, we have kept our equity risk in the portfolio well above its benchmark. This is inline with our fund s strategy to capture convexity of balanced convertible bonds. The fund s outperformance was driven by the positive equity trend in November combined with an abovebenchmark risk exposure. While good equity data moved prices of convertible bonds, it did not change the overall risk characteristics in the market much. The overall Asian market for convertibles remains at the lower end of convexity. More than half of the Asian convertible universe can be considered out of the money or bond like. We have retained a clear underweight in this section of the market and will try to keep the fund s focus on balanced convertible bonds. China and Hong Kong based companies continue to make up the vast majority of our holdings. Additionally, in terms of country risk allocation we retain strong overweights in China and Hong Kong. We have increased a number of off benchmark Japanese positions. Also, our positions in New Zealand, Australia and the US are off benchmark positions. With regard to sector exposure, we remain positive on sectors such as IT, industrials, consumer discretionary as well as materials. We continue to be underweighte in real estate and energy. In valuation terms, Asian convertible bonds were unfazed by the latest equity market set-back and continue to trade just below their fair value. Hence, Asia offers relative value on a global comparison. The fund s running yield continues at around 0.65%. The portfolio s bond floor remains at a very high level of over 96% while the overall credit rating of the fund stays on a BBB average with a credit spread of around 200 basis points. Outlook and Strategy Asian stock markets remain under the combined pressure of tariffs, stronger USD and a less benign growth outlook. Any easing of this pressure as seen in the G20 summit can move markets positively. Any events such as the arrest of Chinese managers in Canada on US orders can result in substantial market losses. On balance, we see the advantages of convertible bonds in such a volatile environment. On a positive side, most of the tariff effects are clearly priced into the market. On the other hand, the general stock market trend in Asia remains negative. Since the start of the year, the Shanghai Shenzhen CSI 300 index has lost more than 21% and hence is officially in a bear market. Hong Kong s Hang Seng and the overall MSCI Asia ex Japan are holding up a little better with -11% and -15% respectively. The clear message is a strong headwind for convertible bonds. In these times, it is the protective qualities of converts that attracts investors to this asset class and convertibles provided very efficient protection. Moreover, the performance since the start of the year does not even hint at severe market problems: the Thomson Reuters Asia ex Japan is down -1.6% in US Dollar terms for the first ten months. However, recent market volatility has clearly increased which in turn allowed us to differentiate more between winners and losers. It has also created compelling convertible bond profiles in the Asian region. While recent data points to a cooling of growth, we remain constructive on the consumer side of the Chinese economy and recently new issues have provided good opportunities to increase exposure to this sector. Finally, Asian convertibles remain cheap and are now trading below its fair value. Asian convertibles are the cheapest region for convertible bonds. They remain under-researched and many convertible bond specialists concentrate on Europe or US issues only. We continue to be of the opinion that convertible bonds offer a compelling balance of risk and reward for investors looking for Asian equity exposure. We remain positive that Asian convertible bonds will provide stability and long-term contribution to a global asset allocation. At the same time we will attempt to keep the overall equity setting in the fund in the balanced range not an easy task given the low average equity characteristics of the convertible bond market 2

3 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. 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. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk. Emerging equity markets may be more volatile than equity markets of well established economies. Investments into foreign currencies entail exchange risks. Investment in bonds and other debt instruments including related derivatives is subject to interest rate risk. 3

4 Fund Data*** 31 October 2018 Team Portfolio managers Size & Holdings Fund size in base currency (USD) Dr. Peter Reinmuth Chris Richards, CFA 171m Region Allocation Portfolio Index Australia 2.19% 0.00% China 63.65% 64.79% Hong Kong 7.52% 9.61% India 0.44% 0.00% Japan 8.98% 0.00% Number of issues 69 New Zealand 1.31% 0.00% Philippines 1.68% 1.55% Portfolio Statistics**** Equity Sensitivity 33.04% Delta 0.43 Bond Floor 95.99% Yield 0.65% Effective duration Average Rating Credit Spread 1.84 years BBB 226 bps ***Source: Schroders 30 November 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. Singapore 3.42% 5.77% South Korea 5.35% 5.25% Taiwan 4.73% 8.92% Thailand 3.19% 1.83% Vietnam 0.00% 2.28% USA 0.59% 0.00% Cash -3.05% n Allocation Portfolio Index Sector Allocation Portfolio Index Consumer Discretionary 14.92% 8.93% Consumer Staples 1.09% 0.93% Energy 3.64% 3.52% Financials 22.24% 17.74% Health Care 4.51% 2.86% Industrials 12.61% 14.15% Information Technology 19.30% 12.10% Materials 11.97% 5.16% Real Estate 12.78% 32.68% Telecommunication Services 0.00% 0.00% Utilities 0.00% 1.94% Cash -3.05% 0.00% 4

5 Credit Rating Equity Sensitivity AAA AA A 3.04% 2.40% 28.50% 39.14% 0-20% 20-40% 31.67% 53.13% 42.86% 31.96% BBB 35.32% 30.75% 40-60% 21.08% 10.45% BB B CCC and below 25.23% 18.28% 7.90% 9.44% 60-80% % 0.95% 0.00% 3.75% 4.45% Thomson Reuters Convertible Bond Asia ex Japan Thomson Reuters Convertible Bond Asia ex Japan Top Ten Issues Holding Portfolio Sector 1 HARVEST INTERNATIONAL COMPANY CONV 21/11/2022 REGS 5.93% Consumer Discretionary 2 CHINA EVERGRANDE GROUP CONV 14/02/ REGS 5.79% Real Estate 3 POSEIDON FINANCE 1 LIMITED CONV 01/02/2025 REGS 4.62% Financials 4 5 CHINA RAILWAY CONSTRUCTION CORPORATION LIMITED CONV 29/01/2021 REGS SEMICONDUCTOR MANUFACTURING INTERNATIONAL CORPORATION CONV 07/07/2022 REGS 4.36% Industrials 4.26% Information Technology 6 CINDAI CAPITAL LIMITED CONV 08/02/2023 REGS 4.23% Financials 7 CHINA YANGTZE POWER INTERNATIONAL BV CONV /11/2021 REGS 4.18% Financials 8 ZHONGSHENG GROUP HOLDINGS LIMITED CONV 23/05/ REGS 4.09% Consumer Discretionary 9 CHINA CONCH VENTURE HOLDINGS INTER CONV 05/09/2023 SERIES 3.25% Industrials 10 KUNLUN ENERGY COMPANY LIMITED CONV 25/07/2019 REGS 2.91% Energy Source: Schroders as at 30 November 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. This document is issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B For your security, communications may be taped or monitored. 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