schroder european alpha funds · position sizing liquidity 3-5 year upside conviction level...

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Schroders Investment Conference 2018, Manchester

22 May 2018

#SICM18

@Schroders_UK

James Sym, Fund ManagerJames Rutland, Fund Manager

Schroder European Alpha Funds

Schroder European Alpha Income Fund Schroder European Alpha Plus Fund

Benchmark FTSE World Europe ex UK index FTSE World Europe ex UK index

Number of stocks 30–50 30–50 (Top 10 > 30%)

Portfolio restrictionsStock +10 %/No minimum +10 %/No minimum

Business cycle style +/- 20% +/- 20%

Tracking risk 4-8% target range 4-8% target range

Launch date 1 May 20126 October 20031 June 2014 (James Sym assumed responsibility)

Structure UK ICVC, UCITs

Share classes A, C and Z income + Accumulation Shares. C and Z Hedged

A, C and Z income + Accumulation Shares. C and Z Hedged

Yield frequency Quarterly NA

Fund overview

1

Source: Schroders.

Concentrated, unconstrained and medium-term

Who we are

James Rutland, Fund Manager

Source: Schroders. *Schroder International Selection Fund will be referred to as Schroder ISF throughout this presentation

2

– Co-manager of Schroder ISF* European Alpha Focus, back-up fund manager for the Schroder European Alpha Income Fund and Schroder European Alpha Plus Fund

– Joined Schroders’ Business Cycle Team in 2014– Investment career commenced in 2010 at Goldman Sachs where he was an analyst in

the industrials team – Chartered Financial Analyst– Degree in Economics, University College London

James Sym, Fund Manager

– Manager of Schroder European Alpha, Alpha Plus and Alpha Focus funds. He joined Schroders in 2013

– James was a Fund Manager at Cazenove Capital Management from 2007 to 2013 – Chartered Financial Analyst– BSc in Natural Sciences (Mineral Physics) and Management Studies, Cambridge

University

Fund manager biographies

What we offer

3

Source: Schroders. As at April 2018.

– Concentrated European Funds of around 40 stocks

– A pragmatic business-cycle approach

– Focused on company meetings and local knowledge from our network of local brokers

– Medium-term (3–5 year) valuation horizon

– Income fund offers around 3.5% yield currently

Anti-consensual positioning to benefit from expectation of rising inflation

What we are thinking

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

4

KEY POINTS

– We are positioned anti-consensually: OW financials/value, UW growth/’bond-proxies’

– We think we are at an inflection point. Inflation is going to rise

– We are seeing early signs of a rotation to position for this

– Inflation rising and value outperforming will be very painful for many European funds

– Not all about the macro. Business cycle is an influence, bottom-up stock picking key

Performance in GBP % Year to date 2017 2016 2015 2014 2013 2012† Since launch1

Schroder European Alpha Income Fund ‘Z Acc’ +0.5 +16.3 +24.0 +13.0 +0.6 +40.1 +15.2 +166.0

FTSE World Europe Ex UK -0.8 +17.5 +19.7 +5.3 +0.2 +25.2 +14.4 +110.8

Relative +1.3 -1.2 +4.3 +7.7 +0.4 +14.9 +0.8 +55.2

Quartile Q1 Q3 Q1* Q1 Q2 Q1* Q1 Q1*

Schroder European Alpha Income Fund

Source: Morningstar, bid to bid with net income reinvested to 30 April 2018, net of fees in GBP, Z Acc. Quartile rankings are based on Z share class (main unit share class), IA Europe ex UK peer group. On 24 March 2014, the fund previously named Cazenove European income Fund, changed its name to Schroder European Alpha Income Fund. Prior to 24 March 2014 the fund uses the trackrecord of Cazenove European income fund (launched on 02 May 2012) as a performance track record.Source of ratings: Morningstar, Square Mile, FE Trustnet and Rayner Spencer Mills, as at 30 April 2018 and Citywire, as at 31 March 2018. 1Launch date: 02 May 2012. *Top decile.

5

Performance to 30 April 2018

Past performance is not a guide to future performance and may not be repeated.

Performance in GBP % Year to date 1 year 2 years 3 years 5 years Since

inception1

Schroder European Alpha Income Fund ‘Z Acc’ +0.5 +10.5 +43.6 +41.5 +106.0 +166.0

FTSE World Europe Ex UK -0.8 +7.4 +38.4 +32.9 +63.3 +110.8

Relative +1.3 +3.1 +5.2 +8.6 +42.7 +55.2

Quartile Q1 Q1 Q1* Q1 Q1* Q1*

Schroder European Alpha Income FundPerformance to 30 April 2018

6

Source: 1Launch date: 02 May 2012. *Top decile. Source: Morningstar, bid to bid with net income reinvested to 30 April 2018, net of fees in GBP. Quartile rankings are based on Z share class (main unit share class), IA Europe ex UK peer group. Source of ratings: Morningstar, Square Mile, FE Trustnet and Rayner Spencer Mills, as at 30 April 2018 and Citywire, as at 31 March 2018


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.

Schroder European Alpha Income Fund – risk factors:

As a result of fees being charged to capital, the distributable income of the fund may be higher but there is the potential thatperformance 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 European Alpha Income FundPerformance as at 31 December 2017

7

2017 2016 2015 2014 2013

Schroder European Alpha Income Fund +16.3 +24.0 +13.0 +0.6 +40.1

FTSE Europe ex UK Index (TR) +17.5 +19.7 +5.3 +0.2 +25.2

Source: Morningstar, bid to bid, net income reinvested, net of fees, as at 31 December2017, based on Z Acc Units, GBP.

Performance in GBP % Year to date 1 year 2 years 3 years Since 30.05.20141

Schroder European Alpha Plus Fund ‘Z Acc’ +0.2 +13.4 +49.8 +46.9 +52.6

FTSE World Europe Ex UK -0.8 +7.4 +38.4 +32.9 +39.4

Relative +1.0 +6.0 +11.4 +14.0 +13.2

Quartile Q2 Q1* Q1* Q1* Q1

Schroder European Alpha Plus FundPerformance to 30 April 2018

8

Source: Morningstar, bid to bid with net income reinvested to 30 April 2018, net of fees in GBP, Z Acc. Quartile rank is based on Z share class (main unit share class), IA Europe ex UK peer group. Source of ratings: FETrustnet, Morningstar and Rayner Spencer Mills, as at 30 April 2018 and Citywire, as at 31 March 2018. 1James Sym began managing the fund on 30 May 2014. *Top decile.


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.

Schroder European Alpha Plus Fund – risk factors:

Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies.





Schroder European Alpha Plus FundPerformance as at 31 December 2017

9

2017 2016 2015 2014 2013

Schroder European Alpha Plus Fund +20.1 +25.3 +12.4 -10.7 +20.3

FTSE Europe ex UK Index (TR) +17.5 +19.7 +5.3 +0.2 +25.2

Source: Morningstar, bid to bid, net income reinvested, net of fees, as at 31 December2017, based on Z Acc Units, GBP.

Investment process

Investment process


11

A robust framework to support pragmatic investing

Investment decision

Local broker network

Meeting senior management on site

European conferences and seminars

A scientific approach

What will move the share price?

3 year valuation upside

If we are wrong, what is the risk?

Position sizing

Liquidity

3-5 year upside

Conviction level

Business cycle approach integrated throughout the entire investment process

Idea generation Hypothesis testing

Business cycle approach

12

Integrated throughout idea generation, hypothesis testing and investment decisions

Typical overweight style groups

Consumer cyclicalsFinancialsIndustrial cyclicalsGrowthCommoditiesGrowth defensivesValue defensives

Recovery

GDPRecession

Expansion Slowdown

Beta

Aiming for consistent outperformance in all market environments

Assessing company earnings and allocating to a style group Tilting the portfolio to suit current positioning in the cycle+

Source: Schroders. Stocks mentioned above are shown for illustrative purposes only and are not a recommendation to buy or sell.

Investment process

Idea generation: bottom-up research, led by senior management meetings

13

Source: Schroders. As at 31 March 2018.

Network of local brokers across Europe

Since March 2016

- 520 management meetings

- 36 multi-city European field trips

- 18 European conferences and seminars

European conferences, seminars and conference calls

Meeting senior management in their office and at their sites

Investment process

Source: Schroders.

14

Hypothesis testing: the scientific method

Make observation

Develop general theories

Extracthypothesis

Design experiments

Collect data

A scientific process to test investment ideas

Accept

Reject

Construct conclusion

Investment process

Source: Schroders.

15

Hypothesis testing: the scientific method - typical hypotheses

Management are incentivised

Debt is feasible

We are protected on the downside

This is a “fat pitch”

Revenue growth is underestimated

Supply tostay flat

Competitive advantage is sustainable

Investment process

Source: Schroders.

16

Investment decision: bringing it all together

Investment decision

Position sizing

Business cycle skew

Fundamental riskframework

Conviction levelLiquidity

3-5 year upside or understand

downside

Target valuation

Opportunity cost

Company Last year

M&A /cash

dividends

end 2 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 -5 -4 -3 -2 -1 5yr tota l -2 -1 1 2 -2 -1 1 2

Air Liquide Dec-12 3.1% 0% 20% 10% 14% 13% 10% 0% 11% 6% 10% 7% 8% 2.1 1.5 1.4 1.6 1.7 68% 1.5 1.6 1.4 1.2 5.8 5.5 5.6 5.8

Akzo Nobel Dec-12 3.3% 0% 0% 0% 0% 50% 0% -25% 4% 4% 0% 3% 5% 1.2 1.2 1.2 1.6 1.7 521% 1.1 1.2 0.6 0.2 4.0 4.0 4.6 5.4

Arkema Dec-12 3.4% - - - - +ve -20% 0% 67% 30% 38% 17% 12% 1.4 1.1 1.3 1.7 1.5 507% 0.6 0.9 0.8 0.6 3.9 4.5 4.6 4.9

BASF Dec-12 4.1% 0% 21% 18% 50% 30% 0% -13% 29% 14% 4% 4% 4% 1.1 1.0 1.0 1.4 1.6 69% 1.0 1.0 0.8 0.7 5.7 5.3 5.5 5.7

Bayer Dec-12 2.8% -44% 10% 84% 5% 35% 4% 0% 7% 10% 15% 11% 10% 1.6 1.3 1.3 1.3 1.5 70% 1.1 0.9 0.7 0.5 6.6 6.9 6.7 6.9

Brenntag Dec-12 2.3% - - - - - - - +ve 43% 20% 9% 12% 1.0 0.8 1.0 1.0 0.8 680% 2.2 2.1 1.6 1.2 5.8 6.0 6.1 6.5

Clariant Dec-12 3.0% +ve -100% +ve 2% 1% -100% - - +ve 14% 6% 14% 1.2 0.8 1.2 1.8 1.4 - 2.0 2.3 1.0 0.7 2.4 2.3 3.1 3.5

DSM Dec-12 3.5% 0% 0% 14% 0% 20% 0% 0% 12% 7% 3% 3% 5% 1.5 1.2 1.3 1.5 2.0 255% 0.0 1.3 0.9 0.6 5.7 4.1 4.7 5.0

EMS Chemie Dec-12 3.2% 5% -49% 25% 10% 9% -15% 0% 30% 8% 7% 10% 7% 1.4 0.8 1.1 1.7 0.0 13% -0.8 -0.9 -0.8 -0.8 8.4 9.2 9.1 9.2

Fuchs Petrolub Dec-12 2.0% 8% 6% 25% 43% 50% 7% 6% 59% 11% 28% -9% 12% 2.9 1.8 1.8 2.0 3.4 20% -0.2 -0.4 -0.6 -0.7 8.5 9.1 9.3 9.0

Givaudan Dec-12 3.9% 10% 10% 80% 7% 4% 3% 9% 4% 2% 64% 12% 10% 2.2 1.3 1.7 2.6 2.1 -7% 1.8 1.3 1.2 1.0 6.8 7.3 7.4 7.6

K+S Dec-12 3.7% 0% 30% 38% 11% 0% 380% -91% 400% 30% 8% -7% 0% 1.3 1.1 1.0 1.3 2.0 181% 0.0 0.4 0.4 0.3 6.2 5.8 5.7 5.9

Kemira Oyj Dec-12 5.3% 10% 3% 6% 33% 4% -50% 19% 167% 10% 0% 3% 10% 1.4 0.8 0.9 1.2 1.2 162% 2.1 2.0 1.6 1.2 5.1 5.0 5.0 5.2

LANXESS Dec-12 2.2% - - - +ve 300% -50% 0% 40% 21% 18% 0% 20% 1.5 1.1 1.9 2.4 2.1 481% 1.4 1.3 1.6 1.2 3.7 4.6 3.9 4.6

Lenzing Dec-12 2.8% 50% 33% 0% 25% 40% 0% 0% -23% 61% -20% -15% 4% 2.2 2.2 2.6 1.9 3.0 44% 0.5 1.1 1.7 1.4 6.4 5.8 4.6 5.0

Linde Dec-12 2.3% 0% 11% 12% 12% 13% 6% 0% 22% 14% 8% 7% 10% 1.4 1.2 1.2 1.4 1.5 205% 1.8 2.4 2.0 1.6 4.8 5.1 5.2 5.4

Solvay Dec-12 3.3% 0% 6% 5% 5% 5% 0% 0% 5% 0% 39% 2% 4% 1.9 1.1 0.9 1.5 0.9 333% 1.5 0.9 0.8 0.5 2.9 3.8 3.7 4.1

Symrise Dec-12 2.6% - - - - +ve 0% 0% 20% 3% 5% 15% 7% 1.5 1.5 1.7 1.4 1.5 71% 1.5 1.3 1.1 0.9 7.5 7.7 7.8 8.0

Syngenta Dec-12 2.9% 90% 43% 47% 7% 30% 25% 0% 16% 14% 19% 8% 9% 2.3 3.1 1.9 1.6 1.9 41% 0.4 0.5 0.3 0.1 8.1 8.2 8.3 8.7

Tessenderlo ChemieDec-12 6.5% 0% 6% 0% 0% 6% 5% 0% 0% 0% 33% 0% 0% 1.0 1.1 1.2 1.6 1.6 93% 1.2 2.0 1.8 1.4 1.9 1.7 1.6 1.9

UMICORE SA Dec-12 3.1% 14% 37% 30% 14% 55% 0% 0% 23% 25% 0% 5% 5% 2.0 1.7 1.4 1.7 1.8 30% 0.5 0.4 0.4 0.3 5.0 4.9 4.8 5.0

Wacker Chemie Dec-12 1.3% - - +ve 25% 13% -20% -33% 167% -31% -73% -33% 96% 2.0 2.0 1.5 1.7 1.8 97% 0.1 0.9 1.4 1.4 6.0 4.3 2.4 2.7

Yara Intl Dec-12 4.2% - +ve 4% 6% 60% 13% 0% 22% 27% 86% -15% 2% 1.9 1.9 1.4 1.2 1.2 313% 0.4 0.1 0.0 -0.1 6.8 6.6 6.4 6.1

Capex / Depreciation

Divide

nd Q-scoreDebt/EBITDADiv growth

– Example of the chemical sector, using selected data points– Allows a very rapid and unemotional assessment of the sustainability and growth potential of the

dividend– First stage before further investigation. Often induces questions for management– Always read with valuation in mind

Dividend sustainability database

17

Source: Schroders, as at 31 March 2013. Securities mentioned are shown for illustrative purposes only and are not a recommendation to buy or sell.


Risk assessment vs. position size Companies are assessed over a number of operational and financial metrics

Portfolio constructionTaking intentional risk

18

Source: Bloomberg, as at 30 April 2015. Examples are for illustrative purposes only and are not a recommendation to buy or sell.

100

120

140

160

180

200

220

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Small position, higher risk

Large position, higher risk

Small position, lower risk

Large position, lower riskAltran/Fortum

Abengoa

Incr

easi

ng

risk

Increasing position size

Delta Lloyd

Wienerberger

Bankia Inputs attempt to capture both operational gearing and balance sheet strength

Identify high risk stocks

Once risk has been assessed, both valuation and liquidity are taken into account

Portfolio construction informed by risk bands

Our investment process in action


19

Case study: PGS

Idea generation Hypothesis testing Investment decision

Outcome: PGS rerates on top line inflection

Met PGS management in Oslo

Introduced via brokers: Danske


FCF 2019 yield >20%

Schulumberger and Polarcus conference calls

Supply dramatically

affects pricing

ROCE for new

streamers?

Western Geco fleet

to exit

ROCE for new

streamers?

Downside: Material

Conviction: High

Business cycle skew: In line with cycle.

Liquidity: Adequate

Action:Bought PGS in February 2018Top 10 Holding

Upside: Very significant


20

Case study: IQE

Outcome: Strong growth prospects underestimated by the wider market

What drives the share price?Product range?

Revenue to significantly

increase

2022 revenue: £950m

CREO potential

Met divisional management and management of peers

Introduced via specialist technology broker: BTIG

Conference calls with industry experts, Schroders Asian technology analyst

Upside: Significant

Downside: Limited

Conviction: High

Business cycle skew: Against skew.

Liquidity: Adequate


ROCE for new

streamers?

Mass adoption of

VSCELs


increase


Check Apple & Android

supply chain for 3D

sensing


Action:Bought IQE in March 2017Top 5 holding



21

Case study: Zurich

Upside: Medium

Downside: Protected

Conviction: High


Liquidity: Significant


Outcome: insurer to re-rate from strengthening balance sheet



increase


CREO potential


ROCE for new

streamers?


increase

Met Zurich management in Switzerland and London

Introduced via broker: KBW

Attended financial services conference in Surrey

Dividend yield

sustainable and grows

Is there excess capital?

Provisions conservative,

reserve releases

sustainable

Z-ECM, Solvency II & balance sheet

Action:Bought Zurich in November 2016Top 10 Holding



22

Case study: Bayer Pharmaceuticals

Introduced via broker: Kepler and UBS in London and Frankfurt

Conviction: Medium


Liquidity: Significant


Outcome: Monsanto deal benefits not reflected in current share price



increase


CREO potential


ROCE for new

streamers?


increase

Monsanto deal to unlock value,

crop cycle to recover

Regulatory approvals,

strategic merits? Farm profit

cycle

Met Bayer management in Frankfurt & Leverkusen

Attended UK conference

Secondary research into crop science.

Brazilian market dynamics

Shares undervalued

Action:Bought Bayer in April 2017Top 5 holding

Upside: Medium/significant

Downside: Protected


Market views

Implications of inflation

24

Source: Schroders.

Higher inflation =

higher nominal growth +

interest rates +

end of QE

Completely different portfolio

A completely different portfolio will be needed

– Expectations for inflation have fallen back again– This has been the key driver of the long underperformance of value stocks, especially financials– We expect this to change, Q4 2016 was a ‘practice run’– Previous mantra of “I buy good quality companies” has attracted assets, the result? these are incredibly

crowded trades

25

Source: Bloomberg, as at 25 April 2018. Past performance is not a guide to future performance and may not be repeated. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. Kepler Cheuvreux, as at March 2018.

Market questioning inflation’s return

Euro 5y5y forward inflation expectations

70

90

110

130

150

170

190

210

230

250

95 97 99 01 03 05 07 09 11 13 15 17

(Healthcare + Consumer Staples) / Stoxx 600

(Commodity-Sensitive + Financials + Industrials) / Stoxx 600

Reflationtrade!!!

Financial crisis

Defensive growth versus global and domestic value in Europe

Reflation tradeReflation trade

The components of employee nominal compensation in the Eurozone

26

% Yoy, pp

– Unemployment is now below the long-run median in the eurozone

– We can already identify pockets of actually quite high wage inflation (e.g. R&D engineers, Germany)

Source: Eurostat, Datastream, Kepler Cheuvreux, as at Q1 2018. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Why is an inflation surprise coming?Even Europe now has a relatively tight labour market

-5-4-3-2-10123456

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Compensation per hour - contrib. Hours worked per employee - contrib.Number of employees - contrib. Employee nominal compensation

Capacity utilisation %

27

Source: JP Morgan, as at April 2018. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Why is an inflation surprise coming?

- 10 years of underinvestment means that there is less slack in industrial assets than one thinks

- Our portfolio benefitted from many of these recoveries: UK brick prices are up 30% in 2 years

- This means pricing power = inflation

Capacity utilisation is at the cycle high

What do your clients own…?

28

Source: Schroders and Morningstar. Based on top 10 largest active funds in Europe ex-UK by AUM. Reflation trade refers to the period from 12 July 2016 to 27 January 2017 corresponding to the trough to peak move in inflation expectations as measured by the 5y5y forward.

Many clients had a poor experience during the “reflation trade”

Fund Size (£bn) 3 years to 12 July 2016 Reflation trade

Fund 1 4.6 Q1 Q4

Fund 2 3.1 Q2 Q4

Fund 3 2.7 Q1 Q1

Fund 4 2.6 Q2 Q4

Fund 5 2.6 Q1 Q4

Fund 6 2.4 Q2 Q3

Fund 7 2.1 Q4 Q3

Fund 8 2.0 Q1 Q2

Fund 9 1.8 Q1 Q4

Fund 10 1.7 Q2 Q4

Portfolio positioning

PositioningSchroder European Alpha Plus Fund

30

Source: Schroders, FactSet, as at 30 April 2018. Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Business cycle relative weightingsTop 10 stocks Fund size: £396m

Stock Weight %

P/E FY1

P/E FY2

Dividend yield

Bayer 5.2 14.7 13.4 2.8

Orange 4.9 13.9 12.8 4.3

Telefonica 4.6 11.2 10.0 4.7

ING Group 4.2 10.5 9.9 4.8

KPN 4.1 21.5 18.4 4.9

Lundin Petroleum 4.1 23.3 25.2 1.2

Aurelius 4.0 13.3 12.2 7.0

Novo Nordisk 3.4 18.3 17.5 2.7

Zurich Insurance 3.0 12.8 11.2 5.7

AXA 2.8 9.0 8.6 5.2

-15.5

-7.0-5.0

2.64.9

5.1

9.6

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Gro

wth

Def

ensi

ve

Gro

wth

Ind

ust

rial

Cyc

lical

Co

nsu

mer

Cyc

lical

Co

mm

od

ity

Cyc

lical

Val

ue

Def

ensi

ve

Fin

anci

al

31

Source: Schroders, FactSet, as at 30 April 2018. 1Fund manager estimate for A Inc share class. Securities mentioned above are shown for illustrative purposes only and are not a recommendation to buy or sell.

PositioningSchroder European Alpha Income Fund

Stock Weight % P/E FY1 P/E FY2 Dividend

yield

Orange 5.3 13.9 12.8 4.3

Bayer 5.1 14.7 13.4 2.8

Telefonica 4.5 11.2 10.0 4.7

KPN 4.1 21.5 18.4 4.9

Altran Technologies 4.1 14.2 12.0 1.7

ING Groep 3.9 10.5 9.9 4.8

Lundin Petroleum 3.5 23.3 25.2 1.2

Ipsos 2.9 11.1 10.5 2.7

Bankinter 2.9 14.7 13.6 3.2

Zurich Insurance 2.9 12.8 11.2 5.7

Market cap weighting

Dividend style % Fund Net yield

Cyclical yield 30.4

3.6%1Growth yield 13.0

High yield 32.5

Stable yield 15.1

68.5

30.0

1.5

Large Cap (>€5bn) Mid Cap (€1-5bn) Small Cap (<€1bn)

Top 10 stocks Fund size: £1,388m

What we ownInflation protection

32

Source: Schroders. Percentages refer to the Schroder European Alpha Income fund as at April 2018.Sectors listed are for illustrative purposes only and should not be viewed as a recommendation to buy or sell. Other Value stocks is a subjective judgement by the fund manager based on future P/E, dividend and free cash flow yields and includes Lundin Petroleum, Bayer, Porr, Ahlsell, Bpost, Continental, Pandora, Dixons Carphone, Lagardere, Ipsos, Atea

FinancialsInsurance and banks

TelecommunicationsIncumbents over challengers

Other Value stocksShort duration

30%

15%

23%

Not expensive

Not over-owned

Not bond proxies

Not excessively cyclical

Inflation beneficiaries

Which financials?There are banks and there are banks…

33

*Dividend Yield includes buyback for DanskeSource for table: FactSet. Source for chart: KBW. As at April 2017. Forecast risk warning: Please see the information slide at the end of this presentation.Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Bank Equity ratio

Return on Equity (2018e)

Dividend yield*(2018e)

Bankinter 12% 13.3% 3.6%

Danske 16% 13.7% 4.7%

ING 14% 10.2% 4.9%

KBC 15% 17.1% 5.1%

Nordea 19% 12.0% 8.1%

Greek banks

ItalianPopulari The banks we own

decreasing risk

80

90

100

110

120

130

140

150

160

170

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

34

Source: Bloomberg. As at 24 April 2018. 1Stoxx Europe 600 Telecom relative to Stoxx Europe 600. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Telecoms performance at an all time low…

previous relative low

new all time relative low...

Telecoms sector 30 year versus Stoxx Europe 600 relative performance1


DifferentRanking funds by Telecoms and Financials exposure

35

Source: Morningstar, Schroders. Data as at 31 March 2018. Report run as at 09 May 2018. Index is the FTSE Europe ex UK. Based on the IA Europe ex UK peer group. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

17/05

/2018

20:23

:51Rank Fund Name % Telecoms1 Fund 1 16.52 Fund 2 15.33 Schroder European Alpha Plus Z Acc 15.24 Fund 4 15.05 Schroder European Alpha Income Z Acc 14.66 Fund 6 13.37 Fund 7 12.48 Fund 8 11.99 Fund 9 11.5

10 Fund 10 10.5: : :: : :: : :

106 Fund 106 0.0

Rank Fund Name % Financials1 Fund 1 34.92 Fund 2 31.13 Fund 3 31.14 Fund 4 31.05 Fund 5 30.96 Schroder European Alpha Plus Z Acc 30.87 Fund 7 30.38 Fund 8 29.99 Fund 9 29.2

10 Fund 10 28.811 Schroder European Alpha Income Z Acc :28.7: : :: : :

106 Fund 106 0.0

Monthly fund updatesFund manager videos commenting on European markets

36

Source: Schroders.

Key points:

Conclusion

37

– On a relative basis European Value is still reasonable value

– This is relative to Growth stocks but especially compared to other asset classes

– Inflation rising will be the key to unlocking this Value

Other considerations:

– Inflation rising and value outperforming will be very painful for many European funds. And the market overall is not cheap in absolute terms

– The challenge is to access this without going too far down the quality curve or taking excessive cyclical risk

– Unlike elsewhere (the US) an active strategy has historically paid off in Continental Europe

– Schroder European Alpha Funds are well placed to access this opportunity

Source: Schroders.

Thank you

Appendix

Active or Passive in European Equities?

5Y rolling return Europe ex UK IA Sector1

41

Return (%)

Source: Morningstar Direct. 1Peer Group: Open End Funds – IA Sector – Europe Excluding UK, excluding Index Funds. Currency: Pound Sterling. *European tracker average = BlackRock -Continental European Equity Tracker, HSBC - European Index, L&G - European Index Trust, Vanguard - FTSE Developed Europe ex UK Equity Index (these represent 15% of the IA Eu ex UK AUM as at 30 June 2017).

Persistent active outperformance20 years of data

-15

-10

-5

0

5

10

15

20

25

30

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Top quartile 2nd quartile 3rd quartile 4th quartile European tracker average*


Percentage of total funds

42

Source: Morningstar Direct. As at June 2017. 1We define a successful fund as one that has been in existence for at least 10 years and has outperformed over that period. Morningstar Direct.

Distribution of ‘successful’ fund underperformance 2007–20171

0%

5%

10%

15%

20%

25%

30%

35%

0 1 2 3 4 5 6 7 8 9 10Years of underperformance

74% underperformed at least 4/10 years

75%Percentage of successful

funds that underperformed for 2 or more consecutive

years

0

10

20

30

40

50

60

70

80

90

100

Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

% of funds outperforming European tracker…

43

Source: Morningstar Direct. Peer Group: Open End Funds – IA Sector – Europe Excluding UK, excluding Index Funds. *European tracker average = BlackRock - Continental European Equity Tracker, HSBC - European Index, L&G - European Index Trust, Vanguard - FTSE Developed Europe ex UK Equity Index (these represent 15% of the IA Eu ex UK AUM as at 30 June 2017). Most concentrated is defined as the 50% of funds with the fewest stocks. High tracking error funds are the 50% of funds with the highest tracking error in each quarter, and we rank passive funds against those funds future returns.

Percentage of active funds beating passive (5 year rolling)

Average index percentile rank

Average against concentrated fundsAverage against high tracking error funds

More active funds outperforming

Fewer active funds outperforming

44

Source: Scott, T. L. (2016). Performance and Active Fund Manager’s Personality – is there a connection? Unpublished, Birkbeck, University of London.

“People buy people…” 17/

05/

201

8

20:

23:

51

Performance

Openness to experience

Agreeableness

Conscientiousness

Extraversion

Neuroticism

Performance

Openness to experience

Extraversion

Looking elsewhere

Disclaimer

Marketing material for professional investors or advisors only. 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.

Schroders has expressed its 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 presentation 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. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

The forecasts included in this document should not be relied upon, are not guaranteed and are provided only as at the date ofissue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.

FTSE International Limited (“FTSE”) © FTSE 2018. 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 vestin 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.

Issued in May 2018 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. PEE01091

45

Disclaimer

Schroder European Alpha Income Fund – risk factors:

As a result of fees being charged to capital, the distributable income of the fund may be higher but there is the potential thatperformance or capital value may be eroded.





Schroder European Alpha Plus Fund – risk factors:

Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies.





46

ContactAdvisory sales desk: +44 (0) 207 658 3894

Asset Manager sales desk: +44 (0) 207 658 3210

Schroder Investment Management Limited,

31 Gresham Street, London EC2V 7QA.

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