EXAMPLE Portfolio 3. Commentary Fourth Quarter 2017

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1 This summary provides market commentary from our investment experts, and details any changes made to Portfolio 3 during the fourth quarter of The commentary is intended to give you a general overview of the market, and does not constitute advice. In brief: US President Trump signed his much-vaunted $1.5 trillion tax cut into law Bond markets were volatile in the final quarter of 2017 UK commercial real estate delivered positive performance during the fourth quarter Demand for industrial assets was particularly buoyant, as favourable fundamentals and the security of long-lease income continued to attract investors Environment Global equities finished 2017 in fine style, with many indices hitting all-time highs. The ongoing improvement in the world s economy and a strong corporate reporting season drove this. Sentiment also received a fillip after US President Trump signed his much-vaunted $1.5 trillion tax cut into law. As with much of the year, politics remained to the fore. This included a vote for independence in Catalonia (rejected by Madrid), the formation of the EU s first far-right government in Austria and a landslide snap election victory for Japanese Prime Minister Shinzo Abe. Meanwhile, Brexit talks progressed to the second phase after the striking of a last-minute deal. Bond markets were volatile in the final quarter of There was another interest rate hike in the US, while in the UK the Bank of England raised interest rates for the first time in more than a decade. Global government bonds did manage to deliver a small positive return. In the UK, the breakthrough in Brexit Commentary Fourth Quarter 2017 negotiations was positive for gilts. Meanwhile, the announcement that the European Central Bank would reduce its bond-buying programme more gradually than expected benefited European bonds. Corporate bonds experienced a positive quarter given the generally robust global economic environment and solid corporate earnings. UK commercial real estate delivered positive performance during the fourth quarter, concluding a relatively rewarding year for investors. Income returns remained strong, supported by robust occupational demand, while capital values also strengthened over the year. UK investment volumes held up well, still largely driven by overseas buyers. Demand for industrial assets was particularly buoyant, as favourable fundamentals and the security of longlease income continued to attract investors. As a result, the sector delivered the strongest returns over the quarter and the year. 01

2 Activity We review the Strategic Asset Allocation (SAA) for each of the 1825 portfolios every quarter, with the aim of ensuring that we continue to meet investors long-term interests. At the most recent review, we made several changes to the SAA model. We added two new defensive asset classes global corporate bonds and short-dated global corporate bonds. Introducing global corporate bonds enables the 1825 portfolios to access a far larger and more liquid bond universe. We also increased the allocation to absolute return bonds. These investment decisions serve to both diversify risk and to broaden each fund s range of return sources. Within the growth assets, we added global REITs as a longer-term strategic holding, believing that it is now appropriate to make these assets a permanent feature of the strategic asset mix, rather than a tactical allocation. This should provide the funds with even greater liquidity and enhanced diversification across global property markets. Meanwhile, we continue to seek growth opportunities in the 1825 portfolios alongside income in a world of low yields. Despite historically low growth, there should be cyclical opportunities as economic activity broadens out, so company profits may be sustained. Political risks have dampened but could still surprise investors, positively or negatively. In addition, monetary policy does not need to tighten aggressively as underlying inflation is restrained. As a result, we favour equity risk assets and selected high-yielding fixed income assets. We therefore made the following Tactical Asset Allocation (TAA) changes during the fourth quarter. Within equities, we continue to favour European equities and we also increased the overweight position in Asia Pacific and emerging market equities. We retained the underweight allocation in UK equities, given our tactical preference for overseas equities. We introduced a modest overweight allocation to global high-yield bonds. We closed the underweight position in UK real estate and closed the overweight position in global REITs. In terms of the underlying funds, we have highlighted below some key purchases and sales during the quarter. We bought the PIMCO Global Investment Grade Credit Fund, the Robeco Global Credits Fund and the Robeco Global Credits Short Maturity Fund. We also invested in the T. Rowe Price Dynamic Global Bond Fund and the Legal & General Emerging Market Local Government Bond Index Fund. Meanwhile, we sold the Morgan Stanley Sterling Corporate Bond Fund and the Standard Life Investments Emerging Market Debt (LC) Fund. Elsewhere, we sold the ishares Global Property Securities Equity Index (UK) Fund, and allocated monies to the First State Global REITs Fund. Other fund sales included the Mirabaud Equity European ex-uk Small and Mid Cap Fund. 02

3 Performance Our SAA contributed positively to performance over the quarter, driven by the synchronised growth we have seen across the globe over the past few months. Our allocations to US, UK and Japanese equities were the largest sources of performance. The contribution from TAA level was positive, with overweight allocations to Japanese, US, Asia Pacific and emerging market equities all driving performance forward. Meanwhile, an underweight in UK equities detracted from fund returns. Outlook 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 data-dependent. 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. The outlook for bonds is generally less positive. However, 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 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. The comments above refer to the past. Past performance is not a reliable guide to future performance. As with any investment, the value of your fund can go down as well as up and may be worth less than you invested. 03

4 Fund selection: Fund selection as at end December 2017 as at end September 2017 Change +/ Vanguard US Equity Index 7.70% 7.92% -0.22% Vanguard FTSE UK All Share Index 6.45% 6.73% -0.28% SLI Global Absolute Return Strategies (GARS) 5.68% 5.92% -0.24% TM Fulcrum Diversified Absolute Return 4.97% 5.18% -0.21% PIMCO Global Investment Grade Credit 4.20% 0.00% 4.20% Henderson UK Property 3.84% 4.41% -0.57% BlackRock Continental European Equity Tracker 3.65% 1.93% 1.72% Invesco Perpetual Global Targeted Returns 3.55% 3.70% -0.15% Fidelity Index US 3.50% 3.60% -0.10% Majedie UK Equity 3.23% 3.36% -0.13% L&G Japan Index 3.12% 3.42% -0.30% SLI Global Index Linked Bond 3.00% 3.00% 0.00% T. Rowe Price Funds OEIC Dynamic Global Bond 2.90% 0.00% 2.90% SLI Absolute Return Bond 2.90% 2.60% 0.30% Old Mutual North American Equity 2.80% 2.88% -0.08% Nomura US High Yield Bond 2.64% 4.64% -2.00% Ignis UK Property Feeder 2.56% 2.94% -0.38% First State Global REITS 2.20% 0.00% 2.20% Invesco Perpetual European Equity Income 2.19% 2.70% -0.51% Hermes Asia Ex Japan Equity Fund 2.15% 1.95% 0.20% Invesco Perpetual Emerging Countries 2.15% 1.95% 0.20% Mirae Asset Asia Sector Leader Equity 2.15% 1.95% 0.20% Vanguard Emerging Markets Stock Index 2.15% 1.95% 0.20% CF Morant Wright Nippon Yield 2.08% 2.28% -0.20% Robeco Global Credits - Short Maturity 2.00% 0.00% 2.00% SLI UK Equity Income Unconstrained 1.93% 2.01% -0.08% L&G Emerging Markets Local Government Bond Index 1.90% 0.00% 1.90% Robeco Global Credits 1.80% 0.00% 1.80% TwentyFour Corporate Bond 1.56% 3.01% -1.45% Royal London Short Duration Global Index Linked 1.50% 1.50% 0.00% SLI European Equity Income 1.46% 2.30% -0.84% Fidelity UK Smaller Companies 1.29% 1.35% -0.06% Royal London Short Duration Credit 1.05% 1.80% -0.75% Vanguard Short Term Investment Grade Bond Index 1.05% 5.40% -4.35% Vanguard UK Investment Grade Bond Index 1.04% 2.68% -1.64% Cash ( ) 1.00% 1.00% 0.00% Baring European High Yield 0.66% 1.16% -0.50% MSIM Sterling Corporate Bond 0.00% 1.01% -1.01% Mirabaud Equities Europe Ex-UK Small and Mid 0.00% 0.77% -0.77% SLI Emerging Market Local Currency Debt 0.00% 0.50% -0.50% BlackRock Global Property Securities Equity Tracker 0.00% 0.50% -0.50% % % ETF15_WEB_P Standard Life Aberdeen. All rights reserved. 04

5 1825 is the brand for Standard Life group s UK financial planning and advice business is a trading name used by Pearson Jones plc, which is part of Standard Life Aberdeen group (Standard Life Aberdeen plc and its subsidiaries). Pearson Jones plc ( ) is registered in England at 14th Floor, 30 St Mary Axe, London EC3A 8BF and is authorised and regulated by the Financial Conduct Authority is a trading name used by Baigrie Davies & Company Limited, which is part of Standard Life Aberdeen group (Standard Life Aberdeen plc and its subsidiaries). Baigrie Davies & Company Limited ( ) is registered in England at 14th Floor, 30 St Mary Axe, London EC3A 8BF and is authorised and regulated by the Financial Conduct Authority is a trading name used by The Munro Partnership Limited, which is part of Standard Life Aberdeen group (Standard Life Aberdeen plc and its subsidiaries). The Munro Partnership Limited (SC219557) is registered in Scotland at Citadel House, 6 Citadel Place, Ayr, KA7 1JN and is authorised and regulated by the Financial Conduct Authority is a trading name used by Jones Sheridan Financial Consulting Limited, which is part of Standard Life Aberdeen group (Standard Life Aberdeen plc and its subsidiaries). Jones Sheridan Financial Consulting Limited ( ) is registered in England at Datum House, Electra Way, Crewe, Cheshire, CW1 6ZF and is authorised and regulated by the Financial Conduct Authority. 05