Schroder Income Growth Ord SCF

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1 Page 1 of 7 Morningstar Research Report Text as of 06/02/2018, Data as of 13/07/2018 Morningstar Benchmark FTSE AllSh TR GBP Morningstar Category TM UK Equity Income Last Closing Price GBP Last Closing NAV GBP Discount/Premium % Latest Published NAV Latest Published NAV Date 12/07/2018 Traded Currency GBX Yield 4.18 Dividend Frequency Quarterly Total Assets Mil Net Assets Mil Market Cap Mil Net Gearing % 7 Avg Daily Shares Traded Mil (3 month) 0.06 Inception Date 09/03/ k 80k 60k 40k 20k 10k Returns Price NAV Category Index 4k 10 Discounts Premium 5 Discount 0 Average Line YTD Performance % Fund Price Fund NAV /- Category /- Benchmark Morningstar Analyst: David Holder, Senior Analyst The conduct of Morningstar's analysts is governed by Morningstar's Code of Ethics, Securities Trading and Disclosure Policy, and Morningstar Manager Research Integrity Policy. For information regarding conflicts of interest, please click Executive Summary People: Sue Noffke is the named manager but is supported by the small, close-knit and experienced Schroder Prime team that manages around GBP 9.5 billion in a range of mandates with varying degrees of tracking error. This fund is one of its higher-risk mandates. Parent: Schroders is a large, equity-focused investment manager. Board: The board has seen some refreshment over recent years and currently numbers four. The average board tenure is six years with backgrounds dominated by investment over industry. Process: Noffke uses a bottom-up process to identify companies trading at a discount that offer profit growth whilst being mindful of the dividend requirement. She has the ability to invest (up to 20%) overseas to diversify the portfolio. Performance: The fund has outperformed the FTSE All-Share Index and peers under Noffke's reign. The company has a record of 22 consecutive years of paying a rising level of income, which is a primary objective here. Fees: With ongoing charges of a little under 1%, fees are in line with the median fund within its Morningstar Category. We feel that investors are paying a reasonable rather than a compelling fee. Role in Portfolio This is a core holding for those investors seeking primarily a regular and rising level of income with the prospect of longer-term capital growth. The portfolio is primarily UK equity-oriented with some overseas holdings at the margin. The relatively concentrated nature of the portfolio in concert with modest levels of gearing can lead to periods of relative volatility. Morningstar Opinion 06 Feb 2018 Schroders' principal investment objectives are to provide real growth of income, being growth of income in excess of the rate of inflation, and capital growth as a consequence of the rising income. Schroder Income Growth has been successful in its objective, and 2017 saw the 22nd consecutive year of dividend increases. The named manager is the talented and experienced Sue Noffke; she was officially appointed as manager in July 2011, but she took over responsibilities some eight months earlier, when previous manager Sonja Laud went on maternity leave. Noffke has spent her entire career with Schroders and is part of the UK Prime team comprising three members, two of whom have been working closely together for well over 20 years. Although Noffke is the named manager here, the team as a whole formulates the investment strategy jointly. They benefit from a dedicated, albeit relatively junior analyst/assistant fund manager on the team, assisting predominantly with mid-cap names not covered by the wider 12 person Pan-European analyst team at Schroders. Whilst there has been wider personnel changes within the UK team, Noffke's approach hasn't changed, nor has the UK Prime team been outwardly affected, as evidenced by the stability of personnel and the steady assets under management. Since Noffke's appointment, she has been working toward diversifying the income stream and reducing concentration risk. She has widened the number of holdings to marginally north of 40 names from around 30. Maximum stock positions tend to be around the 5% level, although she will hold positions in excess of this on careful consideration of the risk/reward characteristics prevalent (currently Shell, HSBC, and British American Tobacco are all above 5% positions). Further, shareholders have approved the use of non-uk-listed names up to 20% of total assets to improve diversification, although take-up has tended to be quite modest, at around 5% of the portfolio. Noffke can also write call options as another way to enhance income. This hasn't been a dominant feature of the portfolio, especially recently, with low implied volatility levels and can account for a maximum of 20% of income generation. But when employed, it has helped to top up the revenue reserve account. That account has been used by the board in the recent past to ensure they kept their commitment to grow the dividend each year, and shareholders can take comfort in knowing the board stands by this commitment. Noffke and team is an assured and very capable pair of hands for income-seeking investors. The process is sensible and has delivered on its objectives for investors over the medium to long term. We have little hesitation in reiterating the fund's of Bronze.

2 Page 2 of 7 Morningstar Research Report Text as of 06/02/2018, Data as of 13/07/2018 People Manager Sue Noffke Manager Start 01/07/2011 Avg. Manager Tenure 7.0 Years Other Funds Managed Schroder Prime UK Equity I Acc Sue Noffke has been named manager since July 2011, but her involvement in the fund extends back eight months earlier, when previous fund manager Sonja Laud went on maternity leave. Noffke joined Schroders in 1989 and has spent her entire investment career with the firm. She spent her first three years as an analyst covering sectors including insurance, tobacco, and retail; she then started running money four years later for Schroders' institutional clients. She has been a member of the three-member Schroder Prime team since 2006; although the team is small, its length and depth of experience is strong. Noffke has worked with Andy Simpson for more than 28 years, and even though Noffke is the named manager here, all team members are involved with the management of the portfolio. In addition to this offering, Noffke has comanaged two openend funds with her colleagues since 2006: Schroder Prime UK Equity and Schroder UK Core, which closed in Simpson has 28 years' experience managing portfolios at Schroders. He also joined the Prime team in 2006 and is a member of Schroders UK Corporate Governance Committee. Jessica Ground left the UK Prime team in 2017 to focus on her role as global head of stewardship, having joined the team in The team is completed by a Matt Bennison who joined in 2014 from the private client team at Schroders. He augments the central research capability, especially on midand small-cap names, and is also an assistant fund manager on the team. Parent Fund Advisor Domicile Website Schroder Investment Management Ltd UK igf/home/ Schroders has benefited from stable ownership since it was founded more than 200 years ago, and the Schroder family still holds nearly half of the company's listed shares. Following completion of the Cazenove acquisition, the company's assets under management amounted to GBP 420 billion as at the end of September Schroders' current strength lies in its equity funds. The firm also manages fixed-income, alternatives, and multi-asset funds; the acquisition of Cazenove helps to extend the product range further, particularly within the Pan-European equities, fixed-income, and multimanager investment areas. Cazenove, like Schroders, was focussed on asset management, and the acquisition brought some quality fund managers to the firm. We also have seen some departures from Cazenove following the acquisition. On a positive note, in recent times Schroders has become more adept at managing capacity issues with some of its more popular funds, where previously it had overmarketed already hot-performing products. Fund managers' remuneration is based on the performance of their funds over one- and three-year periods, and generally more weight is placed on threeyear returns, but there are teams, such as global emerging markets, that put more emphasis on one-year results. Board of Directors Tender Offer Buyback Authorization No Yes The board comprises four nonexecutive directors with an average tenure of over six years, and it has seen considerable refreshment in recent times with tenures ranging from more than 12 years down to two months. Ian Barby was appointed chairman in 2013 having been a board member since He was previously a managing director of Merrill Lynch and has a wide experience of the investment management industry and of the investment trust sector. Ewen Cameron-Watt was the most recent appointment in December He is a previous managing director at BlackRock, most recently as chief investment strategist but with extensive research experience in Asia. He is also an independent advisor to a number of endowments and pension funds. Bridget Guerin is the next newest appointment in June 2012 and brings investment experience, having served as a managing director of Matrix Money Management Limited, an asset management and distribution firm. The board is currently very investment orientated and so could be due some diversification. All but the newest appointment sit on the board of other listed companies and all but the newest appointment are shareholders in the fund. The board meets formally at least four times a year and holds additional meetings if required; they also have regular contact with the fund manager.

3 Page 3 of 7 Morningstar Research Report Text as of 06/02/2018, Data as of 13/07/2018 Process: Investment Approach Investment Objective: To provide real growth of income, being growth of income in excess of the rate of inflation, and capital growth as a consequence of the rising income. Hedging Policy Tactical Use of Cash NULL No The portfolio is constructed from the bottom up with a focus on those companies able to offer a growing income stream. The philosophy seeks to exploit market inefficiencies leading to the purchase of companies when they are out of favour. Sue Noffke is looking for attractive valuations with the ability to exhibit earnings (and dividend) growth on an 18- to 36-month time horizon. The benchmark is not used to construct the portfolio, and there are active positions against the index. Investors should expect annualised portfolio turnover to be in the 20% range and average holding periods of three to five years. Noffke pays close attention to balance sheets, market position of the company, and its management. Once she has conviction, positions will tend to be initiated in the 0.75% region. Average position sizes will be around 2%, and no single position will typically account for more than 5%. Currently, the portfolio has around 40 names and is not normally expected to have materially more holdings. Noffke can write short-term (three months or less) covered calls to boost income but has not done so in the last two years because of low implied volatility. The process is robust and enhanced by the close interaction and insight provided by her immediate colleagues on the UK equity team. The sell discipline revolves around valuation targets having been met or more likely where the dividend potential is impaired. Process: Portfolio Positioning Morningstar Holdings Based Style Map Deep Val Core Val Core Core Grw High Grw Giant Large Mid Small Micro The fund consistently occupies the large and core value area of the Morningstar Style Box. Metrics such as price/earnings and price/free cash flow are at modest discount to the FTSE All-Share but more in line with the peer group. This is a relatively core portfolio in that its active share is around 50%, tracking error 4%, and it is materially larger cap in nature than its peers and more similar in market-cap profile to the FTSE All- Share. Key current themes and positioning in the portfolio include: sustainable real dividend growth (British American Tobacco); free cash flow generation (Smurfit Kappa); increased payout ratio (Lloyds); sustainable and attractive yield (Shell); and self-help (Micro Focus). Noffke does have the ability to own up to 20% in overseas stocks. Names here include Nordea, Galp, and Deutsche Wohnen accounting for around 5%. During 2017, positions in ENI, Roche, and Imperial Brands were sold and the proceeds used to initiate positions in Diageo, Melrose, and Deutsche Wohnen. World Regions Assets % Greater Europe United Kingdom Europe-Developed 6.54 Europe-Emerging 0.00 Africa/Middle East 0.00 Americas 0.00 North America 0.00 Latin America 0.00 Greater Asia 0.00 Japan 0.00 Australasia 0.00 Asia-Developed 0.00 Asia-Emerging 0.00 Not Classified 0.00 Asset Allocation Top 10 Holdings 31/03/2018 % Assets Long Short Net Cash Equity Bond Other % Assets Royal Dutch Shell PLC B 7.08 British American Tobacco PLC 5.47 BP PLC 4.98 GlaxoSmithKline PLC 4.67 Lloyds Banking Group PLC 4.62 Rio Tinto PLC 4.57 HSBC Holdings PLC 4.39 Prudential PLC 3.17 Aviva PLC 3.10 AstraZeneca PLC 2.81 Sector Weightings % Equity h Cyclical 52.1 r Basic Materials 5.6 t Consumer Cyclical 17.0 y Financial Services 25.0 u Real Estate 4.5 j Sensitive 28.9 i Communication Services 4.3 o Energy 14.5 p Industrials 9.3 a Technology 0.8 k Defensive 19.0 s Consumer Defensive 10.6 d Healthcare 7.5 f Utilities 0.9

4 Page 4 of 7 Morningstar Research Report Text as of 06/02/2018, Data as of 13/07/2018 NAV Performance Analysis Data as of Trailing Returns Price Total Rtn % cent capital preservation characteristics whilst managing to participate in a good element of market upside. There is concentration risk as the portfolio comprises of around 40 names, with the top 10 accounting for around 45% of the fund compared with 25% for the peer group. The modest inclusion of overseas stocks adds to portfolio diversification, especially from an income perspective. +/- Bmark 3 month Month Year Year Ann Year Ann Trailing Returns NAV Total Rtn % +/- Bmark +/- Cat %Rnk In Cat 3 month Month Year Year Ann Year Ann The fund has outperformed the FTSE All-Share Index and Morningstar peer group since Sue Noffke's appointment in July 2011 to 31 Jan 2018 by an annualised 2.2% and 1.1%, respectively. More recently, 2017 saw the fund very marginally behind the index but comfortably ahead of peers. Positive drivers to returns included not owning Shire and Barclays, whilst being overweight in Bellway, Intermediate Capital Group, and Taylor Wimpey. Detractors included being overweight BT, Daily Mail, Centrica, and Glaxo whilst also not owning Diageo. Calendar Total Returns Fund(price) Fund(NAV) YTD -10 Discount / Premium Data as of Discount / Premium % 6 Mo 1Yr 3Yr High Average Low Z-Statistic The board does not enforce a strict discount-control mechanism, but it can buy back shares at its discretion. It has tended to do so only at times of duress in the market, such as the end of 2007, and when it believes buybacks will benefit the company and its shareholders. Since the market turn in March 2009, the fund has mostly traded at a single-digit discount, and at times it has even moved to a premium; the board has not repurchased any shares recently and holds none in treasury. There is the provision of a continuation vote every five years (last held in December 2015), which should keep the discount relatively tight. The current discount is 8% (February 2018). Risk & Return Data as of Morningstar Rating Return Risk Rating 3 Year Above Avg Above Avg 5 Year Above Avg High 10 Year Above Avg Avg Overall Above Avg Above Avg The fund's Morningstar Return rating is Above Average overall whilst its Morningstar Risk rating is Average, indicating that risk has been used to good effect here. The fund's standard deviation (a statistical measure of risk) has been marginally higher than the FTSE All-Share during Noffke's tenure but marginally below that of the peer group. Tracking error is also broadly in line with peers. Despite the modest element of gearing here, the downside capture ratio suggests de- Volatility Ratios 3 Yr NAV 5 Yr NAV Standard Deviation Mean Sharpe Ratio Sortino Ratio Risk vs Index 3 Year 5 Year Alpha NAV Beta NAV R-Squared NAV Treynor Ratio NAV

5 Page 5 of 7 Morningstar Research Report Text as of 06/02/2018, Data as of 13/07/2018 Fees Management Fee % 0.75 Ongoing Charge ex Perf Fee % 0.95 Gearing Total Assets Mil Net Assets Mil Dividends Dividend History YTD Dividend Special Dividend Total The fee structure is now a flat management fee of 0.75%, having previously been a combination of tiered management fee and performance fee. We favour transparency for investors and feel that the original structure which combined a tiered management fee and a performance fee, Gearing takes the form of a GBP 30 million revolving credit facility with Scotiabank. This is the first mandate where Sue Noffke has had the opportunity to use gearing, and she has felt very comfortable with this additional string to her bow. The portfolio that she inherited wasn't geared, but she was instrumental in persuading The focus of the trust is first and foremost to provide real growth of income. In the year to the end of August 2017, dividends per share of 11.2p (2016: 10.6p) were declared on revenue per share of 13.26p (2016: 12.08p). Underlying dividend growth over the year was some 9.8%, buoyed in part by sterling weakness through the period. The fund pays its dividends on a quarterly basis, and shareholders have seen growth in their dividend payment every year since the fund's inception in incorporating the capital and revenue account, was overly complicated. The ongoing charge of 0.95% levied for the year to the end of August 2017 (2016: 1.00%) was broadly in line with the category median. the board to allow gearing as she wanted facilities in place to use on market falls, Nonetheless, the total level of gearing is relatively modest, at less than 10% and will not exceed 25% of shareholders' funds. The current level of gearing is 6% (February 2018). 1995, some 22 years. The board has built up the revenue reserves to 9.76p per share or approximately 10 months (from eight months at fiscal-year 2016), which gives comfort it will be able to maintain its targeted progressive income growth, and Noffke has been focused on building up the revenue reserves since her appointment. The introduction of call-writing can boost income in the fund at the margin. The trust yields 4.07% (February 2018).

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