Schroder Global Value Extension Fund. Overview. Portfolio characteristics as at 31 December Quarterly Report December 2017

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1 Overview Portfolio objective To generate long-term returns before fees in excess of traditional capitalisation weighted global equity indices by investing in a diversified portfolio of equity and equity related securities of companies worldwide. The Fund has the flexibility to invest up to 150% long Value stocks and up to 50% short lower Quality stocks. Adding a distinct and diversifying short low Quality strategy creates greater potential to deliver performance across a range of market environments while retaining a strategic bias towards high return Value investing. Key features The advantages of both Value and Quality in one fund While both strategies tend to outperform, through time they tend to deliver their returns at different stages of the economic cycle, offering investors the potential for outperformance across a broad range of market environments. High conviction and diversification A highly diversified portfolio, typically invested in excess of 300 stocks. This high level of diversification reduces stock specific risk without sacrificing conviction Globally unconstrained, all cap portfolio We maximise the opportunity set by looking beyond the index to an investment universe of more than 4,000 stocks. Country risk monitored via a proprietary model Portfolio managers monitor country risk using a proprietary top down model which enables the portfolio managers to understand, monitor and, where necessary, mitigate risk. Performance to 31 December 2017 Relative to MSCI All Country World Index Performance Calendar year Total returns (AUD %) Portfolio (Gross) MSCI All Country World Excess (Gross) Portfolio (Net) Excess (Net) 2017 YTD * Performance Rolling periods Total returns (AUD %) 1 month 3 mths FYTD 1 Year 3 Years 5 Years p.a. p.a. SI p.a.* SI cum* Portfolio (Gross) MSCI All Country World Excess (Gross) Portfolio (Net) Excess (Net) Past performance is not a reliable indicator of future performance. The difference between the portfolio and benchmark returns may not equal stated excess returns due to rounding. *Since inception from 09 September Portfolio characteristics as at 31 December 2017 Fund MSCI All Country World Active share 124.7% N/A Number of stocks (Long/Short) 608/175 2,499 Source: Schroders. Page 1

2 Quarterly Commentary Market update 2017 Q4 2017's macroeconomic backdrop was generally supportive for equities, with low interest rates, stable economic expansion, benign inflation, and generally positive earnings releases allowing investors to overlook a comparatively turbulent geopolitical picture. As a result, global equity markets delivered 12 successive months of positive performance, a feat that has not been seen over the past 30 years. The year began with markets buoyed by President Trump's plans for tax cuts, deregulation and infrastructure spending, and their implications for growth. Whilst his ability to deliver on pre-election promises soon came into question, economic data remained supportive and the US market reached a series of new milestones over the course of the year. In continental Europe, concerns eased following market-friendly election results in Holland and France, with equity markets also responding positively to an extension of quantitative easing (QE) and an improving growth outlook. However, while the Bank of England raised interest rates for the first time in over ten years, UK growth slowed and the uncertainty surrounding Brexit negotiations lingered on. Across the emerging markets, improving commodity prices and a more positive growth outlook successfully diverted attention away from political instability and growing tensions on the Korean peninsula. As a result, emerging markets outperformed developed markets by a significant margin. The technology sector dominated, comfortably outperforming all other sectors and leading to a highly concentrated market driven by a narrow cohort of growth stocks trading on ever-more-extended valuations. Consequently, growth and, to an even greater extent, momentum dominated market returns over the course of the year. While, to some extent, this momentum has been justified by improving fundamentals and the quality of many of these companies cannot be denied, we believe that it is important not to overpay for quality. Therefore, where we might typically expect our focus on quality to provide some diversification under normal market conditions, the market's fixation on expensive high quality stocks has seen the slower growing but equally high quality stocks somewhat left behind. Combined with record low volatility levels, such a narrow market presented a challenging environment for our diversified, valuation-aware approach. With the valuations of the current market leaders looking ever more stretched, the question must be whether they can maintain such high levels of growth in future. This will be reliant on the continuation of more good news and the potential for disappointment is high. Therefore, as many of these names are widely owned, if the market does rotate, we would fully expect volatility to spike higher which would favour our diversified approach. December 2017 Global equities capped off a strong year with another gain in December. US equities advanced over the month. Two recent Republican defeats in Senate contests spurred House and Senate Republicans into action. Fearing the defeats are a sign of things to come in next year s mid-term elections, they agreed the long-awaited tax reform bill. Markets rallied on the news, with big permanent cuts for corporations as the centrepiece of the package. In aggregate, markets in continental Europe posted a modestly positive return in USD terms; Eurozone equities, however, delivered negative returns as profit-taking continued. Macroeconomic data showed the economic recovery continuing, with unemployment lower and inflation edging up. German business confidence remained close to peak levels, despite the collapse of talks to form a coalition government in November. Page 2

3 Quarterly Commentary (Continued) The UK market rose in December reaching a record high. Industrial metals and mining stocks stood out as metals prices rose strongly. The UK government softened its stance on Brexit with the two sides agreeing to move talks on to the future of trade. A resulting temporary decline in sterling against the US dollar and euro helped propel UK stocks higher. Sterling later firmed but the market sustained momentum. Emerging market equities recorded a strong return in December. Chilean equities and the peso rebounded on the election of a new president. Turkish equities gained as the US announced a resumption of normal visa services for Turkish citizens. South Africa also outperformed, underpinned by a rand rally following the election of Cyril Ramaphosa as leader of the African National Congress in December. Asian markets delivered positive returns in December. Indonesia was the strongest market, but Malaysia, Thailand and India also recorded strong gains. Whilst Chinese macroeconomic data was stable and the equity market recorded a positive return, it finished the month behind the broader emerging market performance. Elsewhere in Asia, Japanese equities notched up further gains over the month. The Tankan index, which measures business conditions for large manufacturers, rose to its highest level since Q4 2006, while the unemployment rate dropped to its lowest level in 24 years. The commodity complex registered a solid gain in December. Industrial metals rallied strongly, with nickel and aluminium increasing sharply. A combination of US dollar weakness, strong demand and supply discipline in China all served to push up prices. Energy markets also moved higher with Brent crude and coal posting gains. Strong macroeconomic data from China and ongoing OPEC production cuts proved supportive. In precious metals, the gold price was boosted in part by US dollar weakness. Fund Performance The final few months of the year provided a better environment for the strategy, with a movement of market leadership away from the momentum stocks that have dominated for much of the year. Against this backdrop, the Fund outperformed the index, driven by strong stock selection across a number of sectors with both long and short exposure contributing positively. Notable contributions came from positions in US healthcare, financials and consumer discretionary. On a sector basis, stock selection in healthcare was a key contributor to outperformance, driven by holdings in US healthcare providers. Not holding expensive medical equipment companies was also profitable, as were holdings in European pharmaceutical companies and US biotech. Within financials, we gained from our holdings in US consumer finance, which rallied as US tax reform edged closer, and from UK and US asset managers. Holdings in South Africa also contributed strongly as an improving political outlook boosted the country s financials stocks. Performance within consumer discretionary sector was driven by positions in US and South African retailers, while short exposure, primarily in auto makers and retailers, also added value. Underweight exposure to US utilities was another contributor, as were selective short positions in the sector. Our software exposure also benefitted from shorting expensive, low quality software companies. Our holdings in Japanese telecoms providers were the only main detractor over the month, as the market reacted to news of increased competition in the region. Short US industrials positions also detracted, as the sector rallied over the month. The Fund finished the quarter ahead of the index, with the short positions adding most value. The quarter s outperformance was driven by positive stock selection across both region and sector. Page 3

4 Quarterly Commentary (Continued) Within healthcare, our well-established overweight in healthcare providers proved profitable, whilst not holding and shorting certain US pharmaceutical names also benefited the Fund. Within financials, we gained from our holdings in consumer finance and asset managers, whilst long exposure to some emerging European names and selective shorts in continental Europe also contributed. Our materials holdings did well on the back of rising commodity prices over the quarter, notably mining stocks in the UK and Australia. Once again, our utilities positioning supported performance in Q4. Looking at the strategy, underperformance over the year was driven by the technology and consumer discretionary sectors. In aggregate, some of the underperformance from the long book was offset by selective short positioning. Within technology, our preferred names, specifically attractively-valued companies such as Qualcomm and IBM, weren t rewarded, as investors focused on companies with exposure to topical secular growth themes. The strategy s lack of exposure to companies such as Tencent, Facebook, Alphabet and Nvidia all detracted, as did underweights in Microsoft and Apple. We did have some success with our holding Japanese gaming company and with our enhanced long position in Samsung. On the short side, positive performance from our hardware shorts were offset by positions in expensive software names. Within the consumer discretionary sector, our exposure to retail weighed on returns due to our lack of exposure to expensive growth names Amazon and Alibaba. Our pan-european media exposure also had a negative impact on performance, as the industry felt demand pressure. However, selective short positions in a number or media and retail stocks did add some value. Healthcare and telecoms, two of our favoured sectors from a valuation and quality perspective, suffered in aggregate, although we did see some positive performance from short US exposure, particularly in pharmaceuticals and wireless telecoms providers. Our financials exposure was the top positive contributor over the period driven by our exposure to simple banks, primarily in Japan and emerging Asia. Short positions in expensive US and Australian banks also proved beneficial. Underweight exposure to US utilities also contributed, as did selective short positions in the sector. Positioning Our most significant net long and net short exposures are in financials and real estate, aiming to take advantage of opportunities right across the quality spectrum. We maintain our long exposure to high quality Hong Kong real estate companies, but are net short to the sector overall, viewing the value/quality trade-off within North America and emerging Asia as very unattractive. Within financials, deep value remains within some European and Asian banks. At the other end of the spectrum, we see many high quality companies trading at what we view as very attractive valuations, in particular within complex banks and life & health insurers: and within the US. We remain short wrong cycle banks, in areas where expensive valuations do not reflect, in our view, heightened asset quality risks. Attractive valuations remain across a range of high quality companies in three out of the four defensive sectors. We continue to add to long positions in consumer staples (US mainly) but remain net short overall within staples retailers. We maintain our high net long exposure in health care, amongst pharmaceutical companies (particularly within Europe) and US health care providers. Our long exposure in telecoms has a particular focus on integrated companies and mainly in Asia. Utilities remain overall unattractive. Our exposure to the UK remains the most significant active long position at a region level, where we continue to seek out high quality dividend growth and still attractive valuations. Page 4

5 Attribution against MSCI All Country World Index Sector 2017 Q4 Health Care Consumer Discretionary Financials Materials Telecommunication Services Utilities Consumer Staples Energy Information Technology Real Estate Industrials Stock Selection (%) Asset Allocation (%) Region 2017 Q4 North America Continental Europe Portfolio details as at 31 December 2017 Portfolio size A$5m APIR code Emerging Markets Emea Emerging Markets Latam SCH0043AU Redemption price Inception date 09 September 2010 Buy/Sell spread Emerging Markets Asia Pacific Ex Japan United Kingdom Management costs 1.03% Distribution frequency Japan Stock Selection (%) Asset Allocation (%) The attribution analysis shown above is intended to provide an indicative summary of the contributions to relative performance. The information is generated using Factset, a multi-currency performance analytical system. The estimated attribution Sector and Region performance is reconciled with and adjusted to the reported official performance figures. Nil Normally annually June Page 5

6 Portfolio weights versus MSCI All Country World Index Sector Long (%) Short (%) Net (%) Index (%) As at Dec Telecommunication Services Banks Materials Health Care Energy Insurance & Asset Mgt Consumer Staples Consumer Discretionary Real Estate Utilities Information Technology Industrials Cash -7.2 Active Weights Total Region Long (%) Short (%) Net (%) Index (%) As at Dec United Kingdom Emerging Markets Pacific ex Japan Japan Continental Europe North America Cash Total Active Weights Size Long (%) Short (%) Net (%) Index (%) As at Mega 31 Dec Large Mid Small Micro Total Active Weights The difference between the fund and benchmark weights may not equal stated active weights due to rounding Schroder Investment Management Australia Limited Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000 Phone: Fax: (02) Investment in the Schroder Global Value Extension Fund may be made on an application form in the Information Memorandum, available from Schroder Investment Management Australia Limited (ABN AFSL ) ( Schroders ).This Report is intended solely for the information of the person to whom it is provided by Schroders. It should not be relied on by any person for the purposes of making investment decisions. Total returns are calculated using exit price to exit price, after fees and expenses, and assuming reinvestment of income. Gross returns are calculated using exit price to exit price and are gross of fees and expenses. The repayment of capital and performance of the Funds is not guaranteed by Schroders or any company in the Schroders Group. Past performance is not a reliable indicator of future performance. Unless otherwise stated the source for all graphs and tables contained in this report is Schroders. Opinions constitute our judgment at the time of issue and are subject to change. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation. For security reasons telephone calls may be recorded. Third party data is owned by the applicable third party identified above and is provided for your internal use only. Such data may not be reproduced or re-disseminated and may not be used to create any financial instruments or products or any indices. Such data is provided without any warranties of any kind. Neither the third party data owner nor any other party involved in the publication of this document can be held liable for any error. The terms of the third party s specific disclaimers are set forth in the Important Information section at Page 6