Multi Manager Diversity Range May 2018

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1 Marketing material for professional investors and advisers only Multi Manager Diversity Range May 2018 Asset Allocation Dashboard May 2018 Positive Neutral Negative View Comments High yield Investment grade Government bonds Spreads have widened, but still hover near all time lows. Whilst there remain some interesting opportunities in the US on a relative basis, our position sizes have moderated. We expect higher quality bonds to continue to trade like gilts for the time being. Bond buy programmes from central banks have been a tailwind, but markets have begun to factor in a reduction in global central bank balance sheets. The potential upside from such low yield levels is limited for the longer term investor. In the US, we still expect the path of future interest rate rises to be modestly higher than the market is currently pricing. Western government bonds are likely to remain highly sensitive to the nuances of Central Bank guidance, particularly in Europe as we move through the latter part of the year. Currencies vs View Comments Yen The yen still appears a relatively defensive currency in bouts of volatility. The potential for new, as yet untested, policy measures could, though, place downward pressure on the Japanese currency, so we remain vigilant. $ Rising twin deficits should prove a headwind, despite the recent bounce. The dollar has typically faired poorly in periods of rising inflation expectations, which we expect to see continue in the coming months. Political and economic uncertainty surrounding Brexit and Italy may see ongoing volatility. However, an improved macroeconomic backdrop may alter the path of central bank policy, which could be a positive for the currency. Asia currencies These remain undervalued relative to Western currencies over the very long term. Equities View Comments UK Europe Investor positioning remains skewed towards quality and growth. We continue to lean against this consensus call given the balance of valuations. Economic growth has re-emerged. Selective opportunities can be found, particularly in more domestic facing areas that have previously felt unloved. North America Price momentum became the over-riding factor for US equities in Despite recent volatility, these still trade at a significant premium. We continue to prefer other markets, believing that over the medium term, price and fundamentals tend to align. Multi Manager Diversity Range May

2 Asset Allocation Dashboard May 2018 Positive Neutral Negative Equities (cont.) View Comments Japan Asia Pacific Emerging Markets Earnings potential remains relatively strong. Policy and macroeconomic tailwinds should also provide some support to markets from here. Relative undervaluation is still evident in the large cap value space. Chinese policy easing in 2016 allowed markets to stabilise. However, the year on year impact of this has rolled off as the brakes are applied to the Chinese economy. The region remains susceptible to weakening macro-economic data, but valuations remain less constrained than elsewhere, particularly the US. A strong dollar environment reduced liquidity in many EM markets. However, these pressures eased last year, and selective valuations are not stretched on a relative basis, albeit we still prefer the opportunities in Europe and Japan at present. Alternatives View Comments Absolute: Equity Absolute: Relative value trades remain interesting in a period of high actual volatility. As above, relative value strategies offer potential upside in volatile markets, though the range of genuinely uncorrelated options is narrow. Absolute: Macro Commercial Property Agriculture Precious metals Industrial metals Energy Unconventional global monetary and fiscal policy continues to provide significant opportunity for macro managers. Recent years have highlighted the liquidity mismatch between underlying asset and typical fund structure that we have been concerned about for some time. We would not be surprised by ongoing volatility in a rising rate environment. Selective opportunities may appear given valuations. Gold continues to look attractive as a least worst currency in a more reflationary environment. These areas are vulnerable to changing investor sentiment and the waning impact of Chinese credit expansion. In the near term the price remains vulnerable in both directions to geopolitical risks. Recent political manoeuvres in the Middle East are likely to create volatility and perhaps place some upwards pressure on prices whilst uncertainty prevails in the short term. Multi Manager Diversity Range May

3 Schroder MM Diversity Fund 50% 40% 33.2% 32.8% 33.3% 33.5% 30% 23.4% 23.7% 20% 10% 10.1% 10.0% 0% Equities Alternatives Short-Term Liquidity & Cash End April 2018 End March 2018 Numbers may not add to 100% due to rounding. Source: Schroders, as at 30 April Diversity Fund Equities Alternatives Short-Term Liquidity and Cash Comments Continued global macroeconomic improvement is shifting the policy backdrop, with nine years of monetary accommodation beginning to reverse. We noted previously that price momentum had become the over-riding factor for performance in Recent market pullbacks appear to have highlighted the degree of complacency within the investor community. The volatility episodes across all asset classes in February & March are unlikely to be the last, despite a return to calm in early May. Extended valuations, particularly in the US, look vulnerable. For now, our skew to more reflationary related areas remains. Japan remains interesting on a valuation and earnings basis. European valuations offer some opportunity, albeit we are monitoring political progress in Italy, which is causing some short-term volatility. We remain invested across relatively low duration, opportunistic credit positions with less sensitivity to rising inflation and interest rates. Higher inflation is not great for cash, but it is even worse for longer duration assets. With fixed income no longer likely to offer the downside protection, should global inflation continue to tick up, our alternatives are positioned to protect against potential wobbles in asset market valuations. These proved a drag to returns in 2017 given the broad shift upwards in near everything. However we believe these will be hugely important going forward particularly should markets reassess the relative attractiveness of growth stocks versus value. As above, we expect continued asset market volatility. High correlations highlight the need for mixed asset managers, particularly those of a cautious mind-set, to utilise other asset classes, including cash. It is imperative to remain both liquid and nimble. Multi Manager Diversity Range May

4 Schroder MM Diversity Income Fund 60% 50% 40% 30% 20% 10% 0% 53.8% 53.9% 10.1% 10.9% 16.2% 16.0% 19.9% 18.9% Equities Alternatives Short-Term End April 2018 End March 2018 Liquidity & Cash Numbers may not add to 100% due to rounding. Source: Schroders, as at 30 April Diversity Income Equities Alternatives Comments We noted previously that price momentum had become the over-riding factor for performance in This had made certain markets quite vulnerable. Volatility at the start of the year has highlighted the degree of complacency within the investor community. We suspect volatility is here to stay as investors continue to rebalance. In a more reflationary environment there are opportunities in some of the still attractively priced value areas. However, the search for yield through this bull market has reduced the opportunity set as we see it. As such, we remain vigilant of high valuations, particularly in historically fruitful areas for income seekers. We balance this need against the higher risk investors are being asked to take in fixed income markets given the low level of yields on offer there. Our more globally focused funds, such as RWC Global Enhanced Dividend, reflect this more selective stance. UK holdings are a blend of companies with stable business models and strong balance sheets alongside selective sectors that still exhibit relative value. Low duration, opportunistic credit positions remain the focus. However, we have trimmed some of our high yield exposure on tightening spreads. With fixed income no longer likely to offer the downside protection, should global inflation continue to tick up, our alternatives are positioned to protect against potential wobbles in asset market valuations. We have cautioned against overstretching for yield in this environment. In our eyes, low interest rates have led investors to scramble for ever more niche areas without truly understanding their interdependency, particularly with regard to liquidity. We would not be surprised if some of these asset classes were tested in the coming months. Short-Term Liquidity and Cash We suspect increased asset market volatility is here to stay. High correlations highlight the need for mixed asset managers, particularly those of a cautious mind-set, to utilise other asset classes, including cash. There is a clear benefit to remaining liquid and nimble in these markets. Multi Manager Diversity Range May

5 Schroder Multi-Manager Diversity range - risk considerations With some of the Schroder Multi-Manager Diversity funds currency fluctuations may adversely affect the value of investments and the income thereon. Some of the Schroder Multi-Manager Diversity funds invest partly in emerging markets. Investing in emerging markets can be extremely volatile, involving a higher than average risk compared with investing in established markets. The levels and basis of, and reliefs from, taxation may change. Investors should obtain professional advice on taxation where appropriate before proceeding with any investment. The funds will invest mainly in collective investment schemes which themselves may invest in bonds, equities and alternative investments each of which will have specific risks as detailed in the full Prospectus. Derivative instruments may be used in the funds for the purposes of efficient portfolio management only. This should not lead to an increase in the risk to the funds. The managers will employ a risk management process to manage any derivative exposure achieved for the purposes of efficient portfolio management. For professional advisers only. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The securities shown are for illustrative purposes only and not a recommendation to buy or sell shares. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Issued in May 2018 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: England. Authorised and regulated by the Financial Conduct Authority. UK Multi Manager Diversity Range May