Schroders Multi-Asset Investments Alternative Access Schroder Liquid Alternatives IE FIM Adam Farstrup Head of Multi-Assets Products, Americas For Financial Intermediary, Institutional and Consultant Use Only. Not for redistribution under any circumstances.
Multi-Asset Investments and Portfolio Solutions (MAPS) Long standing history of partnering with clients Managing multi-asset mandates since 1947 Diversified business managing outcome-oriented strategies: Wealth Preservation, Risk-Controlled Growth, Income, Inflation, Risk- Mitigation and Advanced Beta Over 110 investment professionals in London, New York, Zurich, Hong Kong, Singapore and Sydney Managing over $115bn of assets for clients globally First mandate by country*: 1947 UK 1978 Hong Kong 1980 Switzerland 1990 Australia AUM by region AUM by client type 2007 USA 2011 Canada 2012 Brazil UK Asia Pacific Americas Europe Intermediary Institutional 2012 China Source: Schroders as of June 30, 2016. *Abridged list. 2
Investor Outcomes Aligning our resources and thinking with our clients investment goals Investor Outcomes Wealth preservation Risk-based approach to protecting real purchasing power while limiting losses Risk-controlled growth Delivering long-term growth with superior risk-adjusted returns through diversification and dynamic asset allocation Income Inflation protection Risk mitigation Aims to deliver a diversified income stream with global and regional solutions Aims to protect from inflation or inflation-shocks Seeks to control overall risk in a client s portfolio of assets or liabilities Strategic Beta Alternative Risk Premia Diversified Growth Global Multi-Asset Income Inflation Protection Volatility capping Risk-Managed US Eq Advanced Beta Strategies For certain investors, Advanced Beta strategies offer an efficient means for capturing risk premia through a rules-based approach Source: Schroders. The Multi-Asset team has expressed its own views and opinions and these may change. There is no guarantee that investor outcomes can be achieved. 3
From asset classes to Risk Premia Understanding risk and return drivers Breaking an asset class down into risk premia Risk premium: expected return for assuming a source of risk Example: US investment grade credit (Yield %) 10 Risk premia: building blocks of asset classes Asset classes: composed of one or more risk premia 8 6 4 2 0 31 October 2008 30 September 2015 Risk-Free Rate Duration Risk Premium Credit Risk Premium Source: Schroders, Datastream, 30 September 2015. US investment grade credit is represented by the BofA Merrill Lynch US Corporate Index Shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell 4
Defining Liquid Alternatives
Liquid Alternatives A new tool in the tool kit Liquid Alternatives Access to alternative investment strategies in a regulated mutual fund format Passive Smart Beta Long only active Liquid alternatives offer improved transparency and liquidity They can offer better risk adjusted returns Alternatives Interesting for portfolio construction due to reduced volatility and decorrelation characteristics 43% growth in liquid alternative universe over the last 5 years 1 Source: 1 McKinsey Global Asset Management Growth Cube; Preqin; HFR, 31 July 2014. Does not include retail alternatives (i.e. mutual funds, ETFs, and registered closed end funds). 6
Liquid alternatives defined Uncorrelated, liquid, transparent and cost efficient Liquid alternative funds are typically benchmark unconstrained with a total return or absolute return objective. They may take both long and short positions using leverage (within UCITS limits). They can offer access to traditional alternatives asset classes in a liquid form. Liquid Alternative characteristics Reasons to allocate Typically benchmark unconstrained 1 2 3 4 Ability to take long and short positions Portfolio diversification benefits Use of leverage At least twice monthly dealing Greater transparency May offer protection in down markets Access unique sources of Alpha Reduce directional market risk Strengthen the risk return profile of a portfolio Enhanced liquidity and transparency compared to traditional alternatives Source: Schroders 7
Evolution of portfolio construction with liquid alternatives A simple but effective approach to diversification Equity Fixed Income Other Core Small/Mid/Large Cap Growth/Value/Blend Sector Specific Sovereign Investment Grade High Yield Aggregate Cash Equity diversifiers: Bond diversifiers: Portfolio diversifiers: Liquid Alternatives Equity Long Short Market Neutral Absolute Return Credit Long Short Relative Value Event Driven CTA/Macro Catastrophe Bonds Source: Schroders as at 31 May 2016 8
Schroders AUM breakdown Broad liquid alternatives capability within the firm GAIA $6bn Liquid Alternatives $16bn UCITS Funds $148bn Firm AUM $462bn Source: Schroders, as at 31 December 2015 9
Why alternatives? The benefits of low correlation to traditional asset classes Natural diversification Traditional diversification is not as diversifying as it seems Risk-based diversification can help, but we can lose sight of expected returns Alternative investments provide a source of natural diversification in the portfolio, where alternative drivers of risk are uncorrelated with traditional risk premia But investing in only one alternative investment is not enough to effectively diversify a portfolio Schroder Liquid Alternatives IE FIM provides access to a broad range of liquid alternative strategies, offering diversification and access for Brazilian investors 10
Alternatives Experience
Diversified Completion Fund Actively managed portfolio of alternative investments Actively managed portfolio of alternative investments Strong absolute return with low volatility Helps solve governance issues with accessing alternatives 1,0 0,5 Managing portfolio risk relative to equities Commodities Insurance Linked Securities Credit Arbitrage Property Our investment objective Absolute return target of cash + 4% p.a. 0,0-0,5 Low sensitivity to equities (beta less than 0.3) -1,0 CTAs Leveraged Loans Global Macro Alternative Risk Premia Fixed Income Relative Value Convertibles Convertible Arbitrage Infrastructure Emerging Market Debt High Yield Debt Event Driven 2009 2010 2011 2012 2013 2014 2015 2016 Rolling 12 month beta Average beta since inception is 0.15 Source: Schroders, as at 30 June 2016. Rolling 12 month beta measured against an equity comparator comprised 60% FTSE All Share and 40% FTSE World ex UK hedged to sterling. The provision of this data does not constitute investment advice and should not be relied upon for making investment decisions. Performance has been shown in sterling, gross of the standard annual management charge of 0.30% p.a. net of the fees and expenses of the underlying funds. 12
Breadth of the alternatives universe Cast your net as widely as possible Active Asset Allocation Absolute Return Strategies Strategic Alternatives Commodities Convertible Arbitrage Insurance-Linked Securities High Yield Debt Global Macro Property Emerging Markets Debt CTAs Infrastructure Leveraged Loans Event Driven Alternative Risk Premia Convertible Debt Fixed Income Relative Value Cash Credit Arbitrage Currency Global Macro Continuously researching the alternatives landscape for new opportunities Source: Schroders 13
Performance and Risk Risk summary DCF Composite Index MSCI World HFRI FoF Composite CDS Composite Composite Index MSCI World HFRI FoF Composite CDS Composite Annualized Return 4.6% 2.4% 0.3% 0.1% 4.0% Annualized Volatility 4.2% 14.5% 17.5% 5.4% 5.5% Alpha 0.3% 0.4% 0.4% 0.2% Beta 0.17 0.13 0.50 0.40 Correlation 61% 56% 65% 53% Up Capture Ratio 0.14 0.09 0.87 0.50 99% C.F. VaR 2.5% 11.0% 15.1% 5.5% 3.8% Down Capture Ratio 0.16 0.07 0.33 0.25 % of positive months 63% 57% 51% 60% 56% 5,0% DCF Sharpe Ratio 0.93 0.11-0.02-0.12 0.60 CDS Composite** Maximum Drawdown -9% -38% -53% -21% -10% 2,0% Composite Index* Worst Month -2.3% -11.8% -19.0% -6.5% -3.8% HFRI FoF Composite MSCI World -1,0% 0,0% 10,0% 20,0% Risk (%) Source: Schroders, as at 30 June 2016. Risk is defined as standard deviation of monthly returns. All data since inception of DCF and annualised unless otherwise stated. 14
Schroder Liquid Alternatives IE FIM
Schroder Liquid Alternatives IE FIM Mandate s Profile Investment Objective: seeks high risk-adjusted returns in the long term, with low correlation to traditional asset classes Absolute return target of 5%- 8% p.a. Low sensitivity to equities (beta less than 0.35) Portfolio: seeks to achieve objective by delivering access to a broad range of liquid alternative strategies drawn from Schroders global platform delivered locally in Brazil 16 Source: Schroders
Investment Structure Local Vehicle Global Expertise Multi-Asset Investments and Portfolio Solutions Team Investment team of over 100 professionals Sydney New York London Zurich Hong Kong Singapore Schroders Liquid Alternatives Absolute Return Strategies Internally and Externally Managed UCITs Regulatory Framework Long Short Equity Long Short Credit Merge and Arbitrage Fixed Income Relative Value Event Driven CTAs International Funds selection and rebalancing Local FoF implementation Local Currency Hedged FoF Fund Management: Schroders Brasil Portfolio Manager: Huang Seen Fiduciary Administrator and Custodian: BNY Mellon Weekly liquidity 17
Investment Process
Eligible Funds Weekly or daily liquidity products Internally managed Schroder ISF European Equity Absolute Return Schroder ISF European Alpha Absolute Return Schroder ISF European Total Return Schroder ISF QEP Global Value Plus Schroder ISF Asian Total Return* Schroder AS UK Dynamic Absolute Return Externally managed Schroder GAIA Egerton Equity* Schroder GAIA Sirios US Equity Schroder GAIA Paulson Merger Arbitrage Schroder GAIA Indus PacificChoice Externally managed Schroder GAIA BlueTrend Schroder GAIA Two Sigma Diversified Fund Internally managed Schroder ISF Strategic Bond Schroder ISF Asian Bond Absolute Return Schroder ISF EMD Absolute Return Externally managed Schroder GAIA BSP Credit Source: Schroders as at October 2016 * Fund is hard closed. Schroder ISF: Schroder International Selection Fund. Schroder AS: Schroder Alternative Solutions, Schroder IF: Schroder Investment Fund 19
MAPS Manager Selection team Team highlights Team of four professionals Experience across traditional and alternative asset classes Martin Blank, CFA Head of Research, Manager Solutions Saeed Patel, CFA Jane Turner, CFA Richard Hallos, CFA Responsible for Identification and monitoring of external funds for MAPS portfolios Passive investments, active investments Open-ended funds, listed vehicles and segregated accounts Veto right for manager decisions Strong governance framework centred around monthly Manager Selection Investment Committee Focus on proprietary research and genuine insights, not quant-based screening Benefit from relationships with other allocators across the Schroder group Source: Schroders 20
Investment Manager Selection Full due diligence performed based on key requirements for a given strategy GAIA Investment Committee Investment due diligence Experience Track record and skill Investment process Integrity Size Reputation Preliminary regulatory compatibility assessment Risk management capabilities Fit with regulatory requirements Investment diversification rules Asset eligibility Market & liquidity risks Initial review of available regulatory, marketing, and personnel materials Operational due diligence Full documentation review covering all key business areas Onsite visit including thorough validation of all points and processes raised in the documentation review Source: Schroders, as at 30 April 2016 21
Investment Process Seeking diversification and high risk-adjusted returns Universe Initial Portfolio Portfolio Rebalancing Quarterly Portfolio Monitoring Schroders Product Range Minimum AUM USD 25 mn Minimum Experience Strategy: 3 years Minimum Liquidity Weekly Defined Target Capital Allocation for each Asset Class/Strategy (60/30/10) of International Portfolio Equally-weighted funds allocation within each strategy type Local FoF will invest from 67% to 85% into International Portfolio. The Local FoF will be hedged to BRL using USD Futures traded at BM&F Main parameters: Quarterly process to review deviation from target allocations and results Consider addition of newly available funds and closure of existing funds Future enhancements possible as universe of strategies broadens Quarterly Risk Committee Schroders Brazil Quarterly Multi Asset Committee Review Capital and Risk Allocation Review at least Quarterly Risk characteristics of the underlying fund strategies will be reviewed quarterly. Source: Schroders 22
Performance Simulation Equally weighted with currency hedge Cumulative Return (Jan/13 Ago/16) 70% 60% 50% 40% 30% 20% 10% Local FOF. vs. Indices IMA-B Ibovespa CDI Top 5 MM* Correlation 0,37 0,25 0,10 0,11 66% 63% 48% 0% jan-13 abr-13 jul-13 out-13 jan-14 abr-14 jul-14 out-14 jan-15 abr-15 jul-15 out-15 jan-16 abr-16 jul-16 Schroder FoF Liquid Alternatives (100% invested) CDI Schroder Global Liquid Alternatives (80% invested) Return (p.y.) Vol. (p.y.) Schroder FoF Liquid Alternatives (100% invested) 18,1% 3,9% Schroder Global Liquid Alternatives (80% invested) 17,1% 3,1% CDI 13,1% 0,1% Source: Quantum Axis., Schroders. As of 31/08/2016 The simulation considers performance of a buy and hold portfolio and foreign exchange hedge simulated via selling futures index USDBRL. THE INFORMATION IN THIS MATERIAL IS BASED ON TECHNICAL SIMULATION, AND ACTUAL RESULTS MAY BE SIGNIFICANTLY DIFFERENT. 23
Future Research and Development How can we enhance alternatives access 1. Broaden the platform of alternative strategies and consider thematic groupings (i.e. long bias vs. market neutral, etc.) Alpha Alpha 2. Better separate between alpha and beta The understanding of what drives returns has evolved over the past few decades The pursuit of alpha is difficult and expensive Some returns traditionally thought to be alpha can be explained by alternative risk premia Alpha Market Beta Alternative Risk Premia Market Beta Source: Schroders. The views and opinions are those of the Multi-Asset team and may change. 24
Alternative risk premia Requirements for inclusion ** Remove from final presentation ** Intuitive Exists due to behavioral biases in the market Persistent Whilst the magnitude of the premium can vary over time, it cannot be arbitraged away Prevalent Observed broadly across asset classes Diversifying Low correlation with traditional sources of return Cost-effective Allows investors to capture hedge fund beta but with greater transparency, liquidity and lower costs Source: Schroders. The views and opinions are those of the Multi-Asset team and may change. 25
A regime-based analysis Assessing the growth/inflation sensitivities Intuition Growth Intuition Inflation Intuition Momentum 0 Indifferent to all. Only sensitive to past and current prices Momentum 0 Indifferent to all. Only sensitive to past and current prices Carry + Value 0 Size + Like insurance. Best after a crisis and over a long period of time with no crisis/small crises. Best at the end of a long departure from fundamentals and a recognition of that. Larger relative impact on small cap as their sources of financing become less constrained Carry + Value - Size + Different monetary policies lead to larger interest rate differentials Poor market sentiment caused by high inflation can result in investors ignoring fundamentals Domestic corporates are less susceptible to margin deterioration caused by rising import costs Alternative Risk Premia Simulated Returns - Empirical Evidence (Feb 1982 Dec 2014) 25% Conditional returns in different Growth regimes 14% Conditional returns in different Inflation regimes 20% 15% 12% 10% 8% 10% 5% 6% 4% 2% 0% S&P 500 Trend Carry Value Size 0% S&P 500 Trend Carry Value Size High Growth Medium Growth Low Growth High Inflation Medium Inflation Low Inflation Source: Schroders. Data is simulated and not actual performance. Past performance is no guarantee of future results. Actual results would vary. For full details regarding the simulation and definitions, please see the information at the end of this presentation. 26
Biographies
Biographies Adam Farstrup, CFA Multi-Asset Investments, Head of Multi-Asset Product, Americas Joined Schroders in 2007 and is based in New York. Investment career commenced in 1997. Currently, Adam is a product manager for the Multi-Asset Investments team. Adam is responsible for communicating information about the team s products to our clients, consultants and potential clients in North America. Previously, he was a product manager for Global and International Equities, based in London and later New York. Adam joined Schroders from RogersCasey, where he was most recently Chief Investment Officer for the multimanager solutions group. Prior to that, he was Director of International Equity Manager Research with the same firm. Adam first joined RogersCasey in 1997 as an analyst. CFA Charterholder. Member of the New York Society of Securities Analysts BA in Economics, Muhlenberg College 28
Important information Simulation: The simulated volatility for the Global Multi-Asset Income Portfolio on slide 42 from the period from June 30, 2009 through April 18, 2012 is based on a portfolio using a fixed weighting of 20% equity (see below methodology), 37.5% corporate bonds (ML Global Broad Market Corporate Index), 17.5% high yield bonds (ML Global HY Index), 7.5% EM corporate bonds (ML EM Corporate Plus Index), 7.5% EM sovereign bonds (ML EM Sovereign Plus Index) and 10% EM USD bonds (ML EM External Debt Sovereign Index). Transaction costs are not included. The calculation methodology for the equity and fixed income components are outlined below: Fixed income To calculate the fixed income element of this simulation we have used Barclays POINT to analyse a model portfolio composed of the fixed allocation in terms of risk factors. This combination of risk factors is then used to estimate the price return series of the portfolio through time. We then added the average yield over the same period of the standard indices of the fixed income components of the portfolio to obtain the total return series. Equity The simulation was calculated using QEP s quantitative methodology using a global equity universe. The simulation constructs a portfolio of high quality high dividend payers, using metrics such as interest coverage, free cash flow and price to earnings, whilst also focusing on value and avoiding dividend cutters. The simulation was constructed to meet a minimum dividend yield of 2% in excess of the MSCI AC World High Dividend Index. There could be no assurance that any transactions actually performed in a managed portfolio could have been executed at the times or prices used for the purpose of calculating the performance in the simulation. No allowance was made in the model portfolio for transaction or advisory fees. The actual performance of managed accounts is also impacted by non-quantitative factors such as additional stock selection and risk management activities of the portfolio management team. These factors cannot be modeled predictably and were not used in preparing the underlying quantitative model or the simulated results. The simulated results are hypothetical results. They do not represent an attempt to show actual performance. They are used only to illustrate the impact of an investment model. They cannot be used to reflect actual or expected managed portfolio returns. 29
Important information The returns are presented as gross returns, including cash, reinvestment of dividends, interest and other income earned in the period and are calculated on a trade date basis after transaction charges (brokerage commissions), but before taxes and management and custody fees. Performance would have been reduced by such fees and the effect of these fees on performance compounds over time. As an illustration see the chart below. The value of a $5,000,000 account would be reduced by the following amounts due to the compound effect of the management fees. (This has been calculated assuming an assumed constant return of 10% per annum* and a hypothetical management fee of 0.75% per annum, which has been applied on a simple average of opening and closing annual fund values): Gross Value Net Value Compound Effect 1 Year $5,500,000 $5,447,500 $52,500 3 Years 6,655,000 6,466,238 188,762 5 Years 8,052,550 7,675,491 377,059 10 Years 12,968,712 11,782,633 1,186,079 *The assumed 10% return is hypothetical and should not be considered a representation of past or future returns. The actual effect of fees on the value of an account over time will vary with future returns, which cannot be predicted and may be more or less than the amount assumed in this illustration. Actual fees may differ from the assumed rate presented above. Please consult Part II of Form ADV for a description of the fees. 30
Important information Past performance is not a guide to future returns. The value of investments can fall as well as rise as a result of market movements. Investments in smaller companies may be less liquid than in larger companies and price swings may therefore be greater than in larger company funds. Exchange rate changes may cause the value of overseas investments to rise or fall. Less developed markets are generally less well regulated than the US, they may be less liquid and may have less reliable custody arrangements. Investors should be aware that investments in emerging markets involve a high degree of risk and should be seen as long term in nature. The Strategy will invest in some higher-yielding bonds (noninvestment grade). The risk of default is higher with non-investment grade bonds than with investment grade bonds. Higher yielding bonds may also have an increased potential to erode your capital sum than lower yielding bonds. The Strategy will invest in Property Funds and Property Investment Companies. It may be difficult to deal in these investments because the underlying properties may not be readily saleable which may affect liquidity. The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in the underlying assets. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. The views and forecasts contained herein are those of the Multi-Asset team and are subject to change. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. The hypothetical results shown must be considered as no more than an approximate representation of the portfolio s performance, not as indicative of how it would have performed in the past. It is the result of statistical modeling, with the benefit of hindsight, based on a number of assumptions and there are a number of material limitations on the retrospective reconstruction of any performance results from performance records. For example, it may not take into account any dealing costs or liquidity issues which would have affected the strategy s performance. This data is provided to you for information purposes only as at today's date and should not be relied on to predict possible future performance. This document is not an offer or a solicitation to acquire or dispose of an interest in securities or other investment instruments described herein. This document contains outline, indicative terms for discussion purposes only and is not intended to provide the sole basis for evaluation of the instruments described. Terms are purely indicative and may change in line with market conditions. Any recipient of this document agrees that the appropriateness of any described structure to its particular situation will be independently determined, including consideration related to the legal, tax and other related aspects of any transaction. Schroder Investment Management North America Inc. ( SIMNA Inc. ) is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the Schroder Funds ). Shares of the Schroder Funds are distributed by Schroder Fund Advisors LLC, a member of the FINRA. SIMNA Inc. and Schroder Fund Advisors LLC are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc and is a SEC registered investment adviser and registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and Saskatchewan providing asset management products and services to clients in Canada. This document does not purport to provide investment advice and the information contained in this newsletter is for informational purposes and not to engage in a trading activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution. Further information about Schroders can be found at www.schroders.com/us. Schroder Investment Management North America Inc. 875 Third Ave 22nd Floor, New York, NY 10022 (212) 641-3800 Schroder Fund Advisors LLC, Member FINRA, SIPC 875 Third Avenue, New York, NY 10022-6225 (800) 730-2932 31
Important information This material regarding the Schroder Liquid Alternatives IE FI Multimercado was prepared by Schroder Investment Management North America Inc. and Schroder Investment Management Brasil Ltda, in response to a request from the client sent to Schroder and should not be understood as an analysis of any securities, advertising material, offer to purchase or sell, offer or recommendation of any financial assets or investment. The purpose of this material is exclusively informative and does not include investment objectives, financial conditions or the particular and specific needs of any shareholders or other investors. The opinions stated in this material pertain to Schroder and may change at any time. The opinions are based on the date of their submission and do not encompass any fact that may have arisen after this date, hence, Schroder is not compelled to update this material to reflect such provisions after the submission of the same. This material is for exclusive Financial Intermediary, Institutional and Consultant and should not be used as support material by other individuals. THIS MATERIAL IS HIGHLY CONFIDENTIAL AND SHOULD NOT BE REPRODUCED OR DISTRIBUTED, ENTIRELY OR PARTIALLY, TO PERSONS OTHER THAN THE ORIGINAL RECIPIENTS. The Fund and the distribution of the shares of the same are not registered at the Brazilian Securities Commission "CVM", and therefore do not meet certain requirements and procedures usually observed in public offerings of securities registered with the CVM, with which investors in Brazilian capital markets may be familiar. For this reason, the access of the investors to certain information regarding the Fund may be restricted. SCHRODER DOES NOT GUARANTEE PERFORMANCE. 32