Schroder US Mid Cap Fund Quarterly Fund Update

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1 Marketing material for professional investors and advisers only Schroder US Mid Cap Fund Quarterly Fund Update Second Quarter 2018 Cumulative returns to 30 June 2018 (%) Z accumulation shares months 1 year 3 years 5 years Portfolio Index Schroder US Mid Cap Russell 2500(TR) Lag d 3 mths 1 yr 3 yrs 5 yrs Discrete yearly performance (%) Fund Benchmark Source: Schroders, net of fees, bid to bid, with net income reinvested. Z Acc share class as at 31 December 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. Summary The fund lagged its benchmark over the quarter. Stock selection has been disappointing overall but particularly in healthcare and consumer discretionary. There were modest changes to our sector positions relative to the benchmark over the quarter. Some notable shifts include an increase to our overweight in materials & processing as we added new names Sensient Technologies and GrafTech International. We also switched Crown into the portfolio in place of Sealed Air. The portfolio s underweight to healthcare also increased after we sold DexCom. The tax bill has had an important impact on American business, with smaller companies experiencing a larger positive effect due to their higher level of effective taxes relative to large cap. Unfortunately valuations have been creeping up, with small caps looking more expensive relative to history on forward earnings, although they still appear to be fairly valued versus large cap. Portfolio characteristics Fund manager Managed fund since 27 April 2005 Fund launch date 27 April 2005 Fund benchmark Fund size Ongoing charge 0.91% 1 Jenny Jones/Robert Kaynor Russell 2500 Index (TR) Lagged 2,029 million Source: Schroders, as at 30 June Based on the last year s expenses for the year ending December Schroder US Mid Cap Fund Second Quarter

2 What happened in the market While the US economy continues to strengthen, there are storm clouds on the horizon on the protectionist front. The US and China have raised the level of tariffs they will be imposing on each other. The same is true for the US and the European Union (EU). Canada has announced tariffs on a variety of US goods including ballpoint pens for national security reasons. Perhaps symbolically, the iconic US motorcycle manufacturer Harley Davidson has announced it will move some production abroad to mitigate the effect of EU tariffs on US products. The president was not pleased. Nevertheless US growth is holding up very well. Job openings now slightly exceed the number of job seekers which is a very unusual situation. Consumer and business sentiment is quite good, and trade concerns favour small and smid caps due to their lower exposure to foreign revenues. Inflation remains a primary concern. At the moment it is a lingering risk as the official data shows at best modest wage increases. However, we are hearing Performance attribution (%) from our companies that they are experiencing rising wage costs in various industries that have yet to be reflected in the US government data (one such example is trucking). We think that increases will appear in the data before too long. We are carefully reviewing debt levels and coverage ratios for our companies. Rising interest rates can be expected to create a headwind for companies with higher debt levels. We believe the Federal Reserve (Fed) has been able to manage monetary policy such that they are staying ahead of inflation so far. The latest dot plot suggests that four rate rises in total are now expected for the year. This is up from three earlier in the year. As noted above we feel that inflationary pressures will slowly emerge in the US with the Fed remaining the key. During the quarter, returns fell in line by capitalisation group with microcap leading everyone and large cap bringing in the rear. Within the Russell 2000 and 2500 indexes the largest capitalisation quintiles lagged smaller capitalisation quintiles for the quarter. Allocation effect Selection effect Sector Total effect Materials & Processing Technology Utilities Energy Producer Durables Consumer Staples Financial Services Consumer Discretionary Healthcare Source: FactSet, average positions over the quarter by ICB Industry. The fund lagged its benchmark over the quarter. Stock selection has been disappointing overall but particularly in healthcare and consumer discretionary. Among our alpha categories all three underperformed the index with turnarounds delivering the best performance albeit still behind the benchmark. Mispriced growth stocks were the next best performers and steady Eddies delivered equivalent returns, about 380 basis points behind the index. We describe our turnarounds as idiosyncratic growth and that is in part what occurred this quarter. Of our two real estate investment trusts (REITs) classified as turnarounds (Brixmor Property and Gramercy Property Trust) the latter experienced an idiosyncratic event: it agreed to be acquired by Blackstone. Brixmor was driven by basic business dynamics: a strong leasing quarter, the sale of six properties plus inline results such as funds from operations (a key metric for REITs) and affirmation of prior guidance. Not holding biotechnology company Nektar Therapeutics contributed as sentiment turned negative after a competitor s drug treatment issued positive data from phase three of the Federal Drugs Administration approvals process. In addition, the company gave a clinical trial update for its own product which fell short of investor expectations. During this trial patients did not react to treatment as well as they did to earlier samples. Advance Auto Schroder US Mid Cap Fund Second Quarter

3 Parts, a retailer of aftermarket auto parts, outperformed following a solid earnings report. The company also benefited from positive industry trends, strong cashflow generation as well as increased investor confidence that margin improvement initiatives are gaining traction. Manufacturer of graphite electrode products for use in carbon arc furnaces GrafTech International performed well due to positive investor sentiment following an initial public offering which included a number of positive sell-side reports. Independent oil natural gas exploration and production company Gulfport Energy rallied after a strong first quarter earnings report. Earnings significantly beat expectations driven by lower costs and management also raised production guidance. The stock also benefited from Permian supply concerns, storage capacity and warmer weather. Meanwhile, Performance Food Group Company, which markets and distributes food products, rallied following a strong earnings report. In addition, sentiment towards restaurants (a related industry) improved over the period. On the negative side, DENTSPLY SIRONA, a manufacturer of dental products and technologies, declined given concerns about management execution of its previously announced strategy, increased competition and plans to invest heavily in its salesforce to maintain market share. Manufacturer and distributor of consumer products Spectrum Brands declined after releasing a disappointing earnings report which included worsethan-expected organic sales and margins. The company also lowered guidance and announced that its CEO would be stepping down. Affiliated Managers Group, which invests in a diverse group of growing, boutique investment management firms, underperformed along with the industry given a difficult period for asset flows. Provider of traditional and non-traditional life and health reinsurance products Reinsurance Group of America sold off after reporting lower-than-expected first quarter earnings as a result of larger-than-expected life insurance claims. Aramark, which provides food, facilities, and uniform services to colleges, businesses and sports amongst others, reported lower-thanexpected organic sales growth and little margin expansion contribution from recently acquired businesses. There was also investor concern that management would not be able to execute on aggressive sales and margin targets for the year. Top stock contributors (%) Top stock detractors (%) Stock contributor Relative weight Total return Stock contributor Relative weight Total return Nektar Therapeutics Dycom Industries Advance Auto Parts Leidos Gulfport Energy Fortune Brands GrafTech Int' Owens Corning Performance Food Aramark Source: FactSet, average positions over the quarter. Portfolio positioning as at 30 June 2017 (%) Sector Relative weighting (%) Producer Durables 2.0 Materials & Processing Technology Consumer Staples Utilities Consumer Discretionary Energy -1.7 Financial Services -3.6 Source: FactSet. Healthcare -5.0 Schroder US Mid Cap Fund Second Quarter

4 Key portfolio activity There were modest changes to our sector positions relative to the benchmark over the quarter. Some notable shifts include an increase to our overweight in materials & processing as we added new names Sensient Technologies and GrafTech International. We also replaced Sealed Air with Crown. The portfolio s underweight to healthcare also increased after we sold DexCom. We added the manufacturer of graphite electrode products used to produce electric arc furnace metals GrafTech International as part of an initial public offering. The company should benefit from a secular increase in demand and be able to maintain pricing given there are limited substitutes and its products are a small proportion of overall production costs. Key stock positions (%) Overweights Sector Relative weight Advance Auto Con' Disc' +2.2 Aramark Prod' Dur' +1.9 Arthur J. Gallagher Fin Services +1.3 Catalent Healthcare +1.3 Fortune Brands Con Disc +1.5 Source: FactSet as at 30 June Intra-Cellular, a biopharmaceutical company which focuses on medical needs neurological disorders, was added given good safety and efficacy data for its upcoming schizophrenia product. As such we believe there is low approval risk for this drug which should experience strong demand once it goes to market. The stock was also added at a compelling valuation. We also initiated a new position in Sensient Technologies which is a manufacturer of colours, flavours and fragrances for the food and beverage industry. The company is well positioned in niche markets and should benefit from secular shifts towards natural and organic ingredients. In addition, recent restructuring has lowered expectations for the stock; however, we believe these changes will improve productivity, increase sales and drive margin expansion. We exited our position in Sealed Air, the provider of food safety and facility hygiene products, given concerns over its relative growth prospects and valuation. The company could experience reduced demand as a result of secular shifts away from the use of plastic globally. ProAssurance, which provides property and casualty insurance, was also removed from the portfolio due to issues in its medical malpractice segment. Increased claims liabilities caused management to increase loss provisions which will impact earnings and created negative sentiment around the stock. We sold producer of glucose monitoring systems for diabetics DexCom as it reached our price target following the approval of its latest G6 device sooner than expected. Schroder US Mid Cap Fund Second Quarter

5 Outlook and strategy As noted last quarter the tax bill has had an important impact on American business, with smaller companies experiencing a larger positive effect due to their higher level of effective taxes relative to large cap. Combined with the good economy, earnings expectations are quite robust. According to RBC Capital Markets (citing Thomson Reuters) expectations for small cap earnings in calendar year 2018 are now 26.8%, compared with 21.0% for large cap. Expectations for 2019 also favour small over large: 20.5% vs. 10.0%. The combination of tax relief, a strong economy and the lowering of regulations has had a salutary effect on American business. Unfortunately valuations have been creeping up, with small caps looking more expensive relative to history on forward earnings, although they still appear to be fairly valued versus large cap. Trade wars? The developing tit for tat tariff spat between the US and China, US and Canada, US and the EU, etc... is gathering an unsettling momentum. We are not quite at the point where we are willing to describe this as a trade war, but if we continue on this path then we will approach the point where we will have to do so. This could be expected to be a problem for the US economy, as well as most economies around the world. In the medium-term, tariffs and trade wars can be expected to have a larger negative impact on US large cap stocks. A greater percentage of their revenues come from non-us sources (36%) than small-cap companies (18%). A rise in the dollar expected We continue to keep a close eye on the US dollar. We still anticipate the Federal Reserve will continue on its path of steady rate rises. All things being equal the dollar should rise in value as rates rise. This can be expected to create problems in particular for emerging market currencies and economies. China has effectively devalued the yuan to mitigate the impact of dollar strength. Final note to our readers As you may know, Russell performs an annual review and reconstitution of their indices. What may be surprising to some is that the new maximum capitalisation (as of the 22 June reconstitution) in the Russell 2000 Small Cap index is $6.6 billion (our upper limit at purchase is $4 billion). For the Russell 2500 (Smid Cap) the biggest stock is now $15.3 billion (our limit at time of purchase is $10 billion). Schroder US Mid Cap Fund: Risk factors Funds that invest solely in the companies of one country or region can carry more risk than funds spread over a number of countries or regions. The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses. Equity prices fluctuate daily, based on many factors including general, economic, industry or company news. Investments in smaller companies can be less liquid than investments in larger companies and price swings may therefore be greater than in larger company funds. In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares. Failures at service providers could lead to disruptions of fund operations or losses. The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund. A derivative may not perform as expected, and may create losses greater than the cost of the derivative. The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss. Schroder US Mid Cap Fund Second Quarter

6 Important Information: This material is not suitable for retail clients. 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. Jenny Jones and Robert Kaynor have expressed their own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: England. Authorised and regulated by the Financial Conduct Authority. Schroder US Mid Cap Fund Second Quarter