Schroder ISF European Opportunities September 2015 Steve Cordell Fund Manager September 2015 For professional investors and advisers only
Schroder ISF European Opportunities Performance Periods to 31 August 2015 Performance in EUR % 3 months 6 months 1 year 3 years p.a. 5 years p.a. Schroder ISF European Opportunities -7.1-1.8 +12.9 +19.9 +14.1 MSCI Europe -9.2-6.3 +7.6 +13.1 +10.2 Relative +2.0 +4.6 +5.3 +6.7 +3.8 Quartile Q1 Q1 Q1 Q1 Q1 Source: Morningstar, performance and quartile rankings are based on A acc shares, on the Morningstar Europe Equity Large Cap Blend category. 1
Fund Manager Steve Cordell Fund Manager Moved across to Schroders as part of the takeover of Cazenove Capital in July 2013 Originally joined Cazenove Capital in 2002 A senior member of the Pan-European equity team and manager of the Schroder European Opportunities Fund, Schroder ISF* European Equity Absolute Return, Schroder ISF European Opportunities, Schroder ISF European Equity ex UK and Schroder European Absolute Target fund Previously at HSBC Asset Management (Europe) Ltd where he was responsible for several retail and institutional Pan-European portfolios Has 21 years of investment experience Source: Schroders. *Schroder International Selection Fund will be referred to as Schroder ISF throughout this presentation 2
Business cycle Pan-European Equity team Matt Hudson Head of Business Cycle UK Europe Matthew Hudson (UK Equity and Income) Steve Cordell (Pan Europe) Michael Zorko (UK Equity Income) Lionel Rayon (Pan Europe, High Alpha) David Docherty (UK Equity) James Sym (Europe ex UK) Charlotte Morrish (UK Equity) James Rutland (Europe ex UK) Wade Pollard (UK Equity) All team members have sector research responsibilities as well as product responsibilities Source: Schroders, as at 31 August 2015 3
23/09/2015 09:37:44 A range of European funds Schroder ISF European Equity Absolute Return Fund Steve Cordell Schroder ISF European Opportunities Steve Cordell Schroder ISF European Equity (ex. UK) Steve Cordell Luxembourg UCITS 115m Luxembourg UCITS 372m Luxembourg UCITS 184m Equity Europe Long / Short Equity Europe MSCI Europe Net TR Equity Europe (ex. UK) FTSE World Series Europe ex UK TR EUR Source for ratings: Morningstar OBSR, Citywire, Rayner Spencer Mills and Trustnet, as at 31 August 2015 4
Investment process
23/09/2015 09:37:45 Business cycle a pragmatic approach Analyse sensitivity of companies earning streams to business cycle Use leading indicators to assess where we are in the business cycle This will determine how much risk we want in the portfolio The beta of the portfolio should therefore change through the different phases of the cycle Stock selection will usually be the key driver of return except at turning points in the cycle Source: BofAML European Quantitative Strategy 6
23/09/2015 09:37:45 Business cycle Sector market divides are not homogenous. They do not necessarily help us determine the behaviour of these stocks within the cycle Define the beta of stocks and allocate them to seven style groupings: Commodity cyclicals Growth Financials Growth defensives Consumer cyclicals Value defensives Industrial cyclicals HIGH BETA LOW BETA Pragmatic approach combining top-down macro view with earnings based security selection Avoid permanent style/size bias Demand for products and services changes throughout the business cycle Operational gearing of companies impacts profitability of companies Source: Schroders 7 Designed to deliver consistent performance
Style groups 23/09/2015 09:37:45 Business cycle and style performance Slowdown Recession Recovery Expansion Growth Growth defensive Industrial cyclicals Growth Overweighting Growth defensive Value defensive Consumer cyclicals Consumer cyclicals Value defensive Financials Financials Commodity cyclicals Market Financials Growth Growth Industrial cyclicals Consumer cyclicals Consumer cyclicals Commodity cyclicals Growth defensives Underweighting Commodity cyclicals Commodity cyclicals Growth defensive Financials Industrial cyclicals Industrial cyclicals Value defensives Value defensive Source: Schroders 8
23/09/2015 09:37:45 Seven style groupings Commodity cyclicals Stocks whose revenues are linked either directly or indirectly to a particular commodity product such as oil, steel, gas, mining, bulk chemicals e.g. BHP Billiton, ENI Consumer cyclicals Cyclical stocks which rely on consumer spending for their revenues e.g. retailers, automotives, house builders, leisure, general retail e.g. Marks & Spencer, Electrolux Industrial cyclicals Stocks which manufacture capital goods or have revenues linked to industrial production e.g. engineering, aerospace, construction e.g. GKN, Atlas Copco Growth Stocks which grow revenues well in excess of GDP with a high degree of uncertainty or volatility e.g. luxury goods, medical technology, IT e.g. Capita, Hennes & Mauritz Financials/interest rate sensitives Stocks whose business depends on interest rate spreads, financial markets and asset valuations e.g. banks, insurers, real estate e.g. Barclays, BNP Paribas Growth defensives Stocks which grow revenues in excess of GDP with a low volatility and high visibility e.g. pharmaceuticals, defence e.g. Tesco, Roche Value defensives Stocks which grow revenues at or below GDP with low volatility and high visibility e.g. telecommunications, utilities, food producers, beverages, tobacco, food retailers e.g. GlaxoSmithKline, France Telecom The stocks and sectors mentioned above are shown for illustrative purposes only and are not a recommendation to buy or sell 9
How we determine turning points in the business cycle IFO business cycle indicator EZ Composite PMI vs. Money Supply The Inventory Cycle Bond yields also key Normalised forecast errors 3m change in orders less inventories European Cyclicals vs Defensives price rel US yield curve (10y 2y) Source: Top: JP Morgan as at August 2015. Bottom LHS: Absolute Strategy Research. RHS: Datastream as at August 2015 10
Portfolio construction Emphasis Pan-European Equity strategy meeting Where are we? Where are we going? 50% 7 style tilts Tilts weighting to reflect our business cycle view Portfolio Avoid permanent style/size bias Diversified portfolio Beta changes through cycle 50% Position sizing Strength of view Potential returns Stock volatility Source: Schroders 11 Stock selection process Quantitative screening Qualitative screening Stock opportunities analysed more in depth
Earnings Revision Ranking Price Relative 23/09/2015 09:37:45 Stock selection process Looking for turning points in relative revisions Quantitative analysis 1.00 0.75 200 150 THALES EPS momentum Price momentum 0.50 0.25 100 50 Valuation Leverage 400 350 300 250 200 150 100 50 0.00 0 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Thales: Trend P/E relative, 1985-2015 Analyst revisions Databases: Bloomberg, Reuters, Datastream, FactSet, Mirabaud Securities Qualitative and quantitative screening of the stock universe is undertaken in order to detect potential opportunities Trend P/E relative Average + 1 SD - 1 SD Source: Mirabaud Securities, Schroders, as at September 2015 12
Performance and Positioning
Schroder ISF European Opportunities Performance Periods to 31 August 2015 Performance in EUR % 3 months 6 months 1 year 3 years p.a. 5 years p.a. Schroder ISF European Opportunities -7.1-1.8 +12.9 +19.9 +14.1 MSCI Europe -9.2-6.3 +7.6 +13.1 +10.2 Relative +2.0 +4.6 +5.3 +6.7 +3.8 Quartile Q1 Q1 Q1 Q1 Q1 Source: Morningstar, A Inc, Total Return, bid to bid, net of fees. Quartile rankings are based A inc. Share, on the Morningstar Europe Equity Large Cap Blend category. 14
23/09/2015 09:37:45 Pan Europe strategy Fund positioning Sector Sector Active view Direction of travel Key stock Commodity cyclicals -2.1% BG Group Consumer cyclicals +2.5% ITV Financials +8.7% Merlin Properties Growth -0.9% Pandora Growth defensives -8.6% Bayer Industrial cyclicals +2.5% = CRH Value defensives -4.2% Imperial Tobacco Source: Schroders, as at 31 August 2015. The sectors and securities shown are for illustrative purposes only and not a recommendation to buy or sell. Based on Schroder ISF European Opportunities 15
Market outlook
The global opportunity set Europe remains attractively valued Cyclically adjusted P/E of global regions 55 50 45 40 35 30 25 20 +1 St dev Pan Europe Average 20.3x 15 10 +1 St dev Current: 13.2x 5 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Pan Europe US Asia-Pac ex Japan Source: Thomson Datastream. As at 31 August 2015 17 54% upside to get to average valuation
Divergence between European and global macro is slowing the recovery 20% 10% 0% -10% -20% -30% -40% -50% -60% Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 MSCI Eurozone +ve to -ve EPS revisions S&P500 MSCI UK Topix MSCI EM Source: Top: BofAML European Quantitative Strategy. Bottom: JPM. As at August 2015 18
Commodity deflation Source: Bloomberg, August 2015 19
23/09/2015 09:37:45 The USA is a worry Source: JPM. Top LHS: Bloomberg. As at August 2015 20
Focus on domestic recovery Persistent European Recovery is very favourable for domestic-cyclicals (Financials) Source: BofAML European Quantitative Strategy, August 2015 21
Italian financials preferred Key holdings in Banca Popolare di Milano and Anima Source: JPM, August 2015 22
23/09/2015 09:37:45 Important information This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the Company ). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has expressed its own views and opinions in this presentation and these may change. This presentation is issued by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, all telephone calls are recorded. Risk considerations: The capital is not guaranteed. All equity forward sales are with a single counterparty. In case of default, the relevant equities will be sold in the market and this may affect performance. 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 may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate. There is no guarantee that a financial derivative contract will achieve its intended outcome, even if the terms of the contract are completely satisfied. Third Party Data Disclaimer: Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data. FTSE International Limited ( FTSE ) FTSE (2015). FTSE is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. 23