Schroder Value Investing Why active matters Simon Adler, Fund Manager October 2018 Marketing material for professional investors only. Not for retail clients
Schroder Value Investing Agenda 01 02 03 The evidence for active The process The funds 1
The evidence Active management adding value Recovery strategies UK (GBP) Since 31 July 2006 (p.a. %) Schroder Recovery Z Acc 9.5 MSCI UK Value 4.8 Income strategies UK (GBP) Since 31 May 2010 (p.a. %) Schroder Income Z Acc 11.0 MSCI UK Value 8.4 Europe (EUR) Since 14 May 2010 (p.a. %) SISF European Value C Acc 7.5 MSCI Europe Value 5.9 Europe (EUR) Since 31 October 2010 (p.a. %) SISF European Equity Yield C Acc 8.7 MSCI Europe Value 5.8 Global (USD) Since 30 October 2015 (p.a. %) Schroder Global Recovery Z Acc 8.1 MSCI World Value 8.9 Global (USD) Since 30 November 2013 (p.a. %) Schroder Global Equity Income Z Acc 7.3 MSCI World Value 6.0 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 amounts originally invested Source: Morningstar, bid to bid, net income reinvested, net of fees as at 31 August 2018. Performance start dates shown are since start of Global Value Team management. Schroder Global Recovery since launch. 2
The Value Team process In a competitive investment world, you have to have an edge FOCUS ON VALUE Informational Analytical Exploiting 130 years of stock market history Consistent, objective, repeatable Organisational Behavioural Efficiency, sharing, learning Eliminating bias, delivering returns Risk Reward Source: Schroders. 3
Schroder Global Value team A complete product suite to leverage the value opportunity UK Europe Global AUM ( m) Total Recovery Recovery Strategy Schroder ISF European Value Schroder ISF Global Recovery 4,508 Strategy Income Income Strategy Schroder ISF European Equity Yield Schroder ISF Global Equity Yield 3,444 14,336 1 Responsible Responsible Value Strategy 90 Solution Maximisers Income Maximiser Strategy Schroder ISF European Dividend Maximiser Schroder ISF Global Dividend Maximiser 5,271 Source: Schroders. AUM as at 30 June 2018. 1 Includes AUM for UK Institutional segregated portfolios ( 1,023m). 4
Schroder Value Investing Conclusion 01 02 03 The evidence for active The process The funds 5
Appendix
Why value matters Why should you focus on cheap prices? 10 year annualised return by starting cyclically adjusted P/E (CAPE) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 0 7 7 14 14 21 21 28 28 35 35+ Cyclically adjusted P/E Past performance is not a guide to future performance and may not be repeated. Source: Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2017, updated. Robert J. Shiller. Based on US Equity market since 1871. 7
Informational The importance of screening Investment universe Always start with the cheapest stocks to avoid style drift Cyclically adjusted valuation metrics Cheapest 20% Source: Schroders. 8
Analytical Our red questions Missing liabilities? Misleading? Structural? profits change The answer to each question contributes an element of risk and /or reward Discovering company DNA The answer to each question contributes an element of risk and/or reward Profits into cash? Financial? Business?? stress-test ESG quality Source: Schroders. Risk Reward 9
ESG is a core foundation of value investing Integrated, quantifiable and genuine Our value approach and long time horizon makes our ESG essential and highly differentiated Governance Management and shareholders aligned? Shareholders capital being allocated appropriately? Stakeholder sustainability Customers respected? Employees and suppliers treated fairly? Government/regulators treated responsibly? Risk Adjust: Normalised profits Enterprise Values Risk scores Source: Schroders. ESG: Environmental, Social and Governance. 10
Active engagement Doing what we can for clients Board & management We ll act to try and ensure appropriate capital allocation We ll conduct other engagements where there s clear benefits M&A We ll do everything we can to help protect clients capital Remuneration We engage, are principled in how we vote and that means often voting against remuneration policies Source: Schroders. 11
ESG integration with investment process Case study Process Case study Tesco Identify ESG issue impacting investment decision Initial analysis suggests Tesco may be unsustainably increasing the delay in supplier payment terms, which could skew return metrics and temporarily inflate free cash flow. Contradicts public commitments to improve following the Grocery Code Adjudicator s (GCA) investigation into payment practices. Collaboration with ESG team Liaise with ESG specialist for expert analysis of Tesco's supply chain management and insights from four previous engagements that focused on changes made after the GCA investigation in supplier payment and policies. Engage with company Analyse response Utilise ESG's strong relationships with the relevant contacts in Tesco to better understand changes in supplier payment terms. Re evaluate, dig deeper where necessary Investment decision Full analysis after our detailed dialogue indicated Tesco s practices are improving and aligning with industry peers, which we believe is sustainable. Post engagement, recognise need for ongoing analysis (impact of Booker integration on payment terms) Source: Schroders, May 2018. The security shown above is for illustrative purposes only and is not to be considered a recommendation to buy or sell. 12
Behavioural All about judgement Overall levels of risk and reward are evaluated and balanced Risk Reward Company 001 Source: Schroders. 13
Organisational The Value Team Archive Efficiency, learning, sharing Source: Schroders. 14
Stock Position held Risk Reward Company A 4.1% 2 55% Company B 3.8% 3 60% Company C 3.3% 3 70% Company D 3.0% 4 75% Company E 2.7% 5 85% Company F 2.5% 5 90% Portfolio construction Largest positions are ideally in stocks with lowest risk Be patient. The average holding period is ideally 5 years Portfolios should be continually monitored to ensure position size reflects both the risk and reward Company G 2.3% 6 100% Company H 1.6% 7 140% Company I 1.6% 8 145% Company J 1.5% 8 150% Company K 1.2% 8 185% Company L 1.2% 9 195% Source: Schroders. The risk score is driven by the company s finances and all other potential risks, including, but not limited to, the regulatory environment, geographic region, industry and management. A lower risk score equates to lower risk. Above data is an illustrative example. 15
The success of a Recovery approach Performance as at 31 August 2018 Recovery strategies Income strategies 2013 2014 2015 2016 2017 Schroder Recovery Fund 46.5 2.4-12.5 31.1 8.1 FTSE All-Share 20.8 1.2 1.0 16.8 13.1 2017 2016 2015 2014 2013 Schroder Income Fund 9.3 25.3-6.6 4.9 33.5 FTSE All-Share Index 13.1 16.8 1.0 1.2 20.8 2013 2014 2015 2016 2017 Schroder ISF European Value 26.2 3.9 12.6 7.0 6.5 MSCI Europe 19.8 6.8 8.2 2.6 10.2 2013 2014 2015 2016 2017 Schroder ISF European Equity Yield 26.5 5.4 6.1 5.1 6.5 MSCI World Europe 19.8 6.8 8.2 2.6 10.2 2013 2014 2015 2016 2017 Schroder ISF Global Recovery - 12.8-16.4 17.7 20.5 MSCI World (USD) - 4.9-0.9 7.5 22.4 2013 2014 2015 2016 2017 Schroder Global Equity Income Fund 17.6 14.6-0.5 35.5 11.1 MSCI World 24.3 11.5 4.9 28.2 11.8 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 amounts originally invested Source: Morningstar, bid to bid, net income reinvested, net of fees as at 31 August 2018. 16
Risk factors Schroder Recovery Fund The fund may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the fund, both up or down, which may adversely impact the performance of the fund. The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses. The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only. Equity prices fluctuate daily, based on many factors including general, economic, industry or company news. 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. 17
Risk factors Schroder Income Fund Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies. As a result of fees being charged to capital, the distributable income of the fund may be higher but there is the potential that performance or capital value may be eroded. 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. 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. Schroder ISF European Value The capital is not guaranteed. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The fund may hold large positions in a particular investment and if market declines or the issuer defaults, then the fund will be adversely affected. 18
Risk factors Schroder ISF European Equity Yield The capital is not guaranteed. The fund intends to make regular yield payments to investors and, if its income is insufficient to cover these payments, these payments may reduce the fund's capital. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. Schroder Global Equity Income Fund As a result of fees being charged to capital, the distributable income of the fund may be higher but there is the potential that performance or capital value may be eroded. The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses. Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk. Equity prices fluctuate daily, based on many factors including general, economic, industry or company news. 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. 19
Risk factors Schroder Global Recovery Fund The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses. Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk. Equity prices fluctuate daily, based on many factors including general, economic, industry or company news. 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. Changes in China's political, legal, economic or tax policies could cause losses or higher costs for the fund. The fund may be investing in China "A" shares via the Shanghai-Hong Kong Stock Connect which may entail additional clearing and settlement, regulatory, operational and counterparty risks. 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. 20
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