Rory Bateman - Head of European Equity
Nicholette MacDonald-Brown – European Equity Fund Manager
For professional investors only. This material is not suitable for retail clients *Schroder International Selection Fund will be referred to as Schroder ISF throughout this presentation
Schroders European Equity Capabilities
Zurich, April 23rd 2013
Contents
1. Introduction
2. Schroder ISF European Total Return
- Investment process
- Fund positioning and performance
- Market view
- Appendix
European Equity capabilities | April 2013 1
Introduction
European Equity team structure
Includes 2 Global Analysts who have full global coverage for their sectors, but a significant impact on European equity portfolios
Source: Schroders as at March 2013
Head of European Equity
Rory Bateman
Specialist Fund Managers
Leon Howard-Spink Paul Griffin
Nicholette MacDonald-Brown
Jamie Lowry
Sonja Laud
Ian Kelly
9 European Equity Analysts*
James Dawson – European Equity Product Manager
Team Fund Managers
Rory Bateman
Martin Skanberg
European Equity capabilities | April 2013 3
Years with
Schroders
Years’
experience
Primary
universe Sector
Justin Bisseker 15 20 Europe Banks
Michael Butler 2 2 Europe Industrials, Autos & Parts
Amy Chamberlain 6 21 Europe Consumer Retail, Staples & Luxury
Goods
Neil Sargent 6 22 Europe Utilities, Energy
Stephen Shields <1 <1 Europe Building Materials and General Retail
Sam Twidale 3 9 Europe Materials, Insurance
John Coyle 10 18 Global Energy
John Bowler 10 18 Global Healthcare
Roberta Zeno 5 5 Italy / Quant N/A
Average years 6 13
Compensation directly linked to performance
Nine European Equity
Analysts organised on
a sectoral basis
Internal continuity
and training
External hires enhance
experience and depth
of team
Commercial focus
European Equity analysts
Source: Schroders. As at April 2013.
European Equity capabilities | April 2013 4
34.9%
1.6%
3.4%
11.2%
48.9%
Assets under management
Source: Schroders. As at 31 December 2012.
Total assets managed by European Equity team €9,209 million
Team
Team Strategy (Rory Bateman, Martin Skanberg)
€4,498m
Italian Strategy and Total Return Strategy
(Nicholette MacDonald-Brown) €148m
Yield Strategy (Sonja Laud, Ian Kelly) €1,031m
Alpha Strategy (Jamie Lowry) €314m
Special Situations/Alpha Plus Strategy
(Leon Howard-Spink, Paul Griffin) €3,218m
Europe ex UK
Euro
Pan
European Equity capabilities | April 2013 5
Large Cap European Equity Product Range
European Equity capabilities | April 2013 6
Luxembourg-
domiciled
Schroder ISF range TEAM UNCONSTRAINED VALUE / YIELD TOTAL RETURN
Pan Europe European Large Cap
(Rory Bateman)
European Special Situations
(Leon Howard-Spink)
European Equity Focus
(Rory Bateman)
European Equity Alpha (Jamie Lowry)
European Equity Yield /
European Dividend Maximiser (Ian Kelly)
European Total Return
(Nicholette MacDonald-Brown)
Euro EURO Equity
(Martin Skanberg) X X X
Fund performance relative to peers ‘Flagship’ European Equity products
Source: Morningstar.
Periods to 31st March 2013 – quartile rankings
European Equity capabilities | April 2013 7
Core 1 year 3 years p.a. 5 years
Schroder ISF EURO Equity Q2 Q1 Q2
Schroder ISF European Large Cap Q3 Q2 Q1
Schroder ISF European Special Situations Q1 Q1 Q1
Schroder ISF European Total Return
Investment process
Schroder ISF European Total Return
European Equity capabilities | April 2013 9
How do we create a low volatility equity fund?
Source: Schroders. As at 31st March 2013. *Ex post annualised volatility based on ‘C’ class shares bid to bid, net of fees.
Stock Selection What is not priced in? Portfolio Construction Contribution to volatility
A Low volatility European Equity Fund
49 Stocks, 71% Exposure, 9% Volatility*
Equity Portfolio
40 – 60 stocks
Tactical Global Financial Stress Index Structural Proprietary Valuation Indicator PM Judgement Macro and political backdrop
Market Exposure
30 – 90%
Step 1
Step 2
Result
Schroder ISF European Total Return Step 1: Stock selection. The questions we are trying to answer
How does the company make money?
What are the key drivers for the company’s operational performance?
Do we have a different opinion to the market?
Growth prospects, operational leverage, returns to shareholders, potential for change
Why are we different from the market?
What can we observe between company reports to validate or challenge our thesis?
What is the catalyst for the market to change its mind?
What is the road map to our target price?
Where could we be wrong?
Downside target price. What would make us change our mind?
European Equity capabilities | April 2013 10
Bi-weekly team debate
Analysts distribute research note and model
24 hrs ahead
Standardised output enables easy cross-
sector comparisons
Benefits
Consistency - are analysts underlying
assumptions consistent across the portfolio?
Perspective – cross sector involvement
means analysts hear peers view about
customers, suppliers and competitors
Focus – your peers are your toughest
audience, team performance is crucial
Schroder ISF European Total Return Step 1: Stock selection. The wisdom of crowds
European Equity capabilities | April 2013 11
Schroder ISF European Total Return Step 1: Stock selection. Brenntag
How does the company make money?
Distributing chemicals
Do we have a different opinion to the market?
Yes, the market underestimates Brenntag’s ability to drive
sales density through their existing network boosting sales
and margins
Why are we different from the market?
In-depth analysis of the company
What is the catalyst for the market to change its mind?
On-going strong results
Bolt on acquisitions
Where could we be wrong?
Significant fall in global IP
Acquisition which is too expensive, or poorly managed
European Equity capabilities | April 2013 12
Picture sourced from Brenntag
Source: Schroders. As at 29 March 2013
Schroder ISF European Total Return Step 1: Stock selection. Sandvik
How does the company make money?
Manufactures equipment and consumables for a range of
industries
Do we have a different opinion to the market?
Yes, the market underestimates new management’s ability
to drive restructuring and margin expansion
Why are we different from the market?
In-depth analysis of the company
What is the catalyst for the market to change its mind?
Better than expected results
Where could we be wrong?
Mining capex cuts hit all areas of spend, replacement and
brownfield as well as new projects
European Equity capabilities | April 2013 13
Picture sourced from ClipArt
Source: Schroders. As at 29 March 2013
Top 10 contributors to volatility: 29th March 2013
Schroder ISF European Total Return Equity book construction
Source: Schroders, As at 29th March 2013. *Figure shows the % contribution to total predicted volatility.
Stock Sector Country % Volatility* % NAV
Weir Group Industrials UK 5.6 2.5
BNP Paribas Financials France 5.0 2.4
Bayer Healthcare Germany 4.8 3.3
DNB Financials Norway 4.6 2.7
Daimler Cons Disc Germany 4.4 2.3
Sandvik Industrials Sweden 4.2 2.0
GEA Industrials Germany 3.6 1.9
ING Financials Netherland 3.6 1.6
Xstrata Materials UK 3.5 1.8
Arkema Materials France 3.5 1.7
European Equity capabilities | April 2013 14
Equity market cap split
Over €10 bn 60.1%
€3bn to €10 bn 38.3%
Less than €3 bn 1.6%
Schroder ISF European Total Return
Step 2: Market View. How big are the risks to market performance?
1 Source: Bank of America Merrill Lynch. Bloomberg ticker: GFSI Index 2 The composite valuation indicator is a proprietary tool based on a number of common valuation metrics for the equity market, both relative to its own history and relative to other
asset classes
Quantitative indicators combined with qualitative inputs used to formulate market view
Composite valuation indicator2
BofAML Global Financial Stress Index1
Market view: positive
No further action required
Market view: negative
Reduce market risk in portfolio
European Equity capabilities | April 2013 15
40
60
80
100
120
140
160
180
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
GFSI (LHS) MSCI Europe (RHS)
Standard Deviation MSCI Europe rebased to 100 Jan 2005
40
60
80
100
120
140
160
180
-5.00-4.00-3.00-2.00-1.000.001.002.003.00
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
Composite Valuation Indicator (LHS) MSCI Europe (RHS)
MSCI Europe rebased to 100 Jan 2005 Standard Deviation
Risk Index
Skew Index
Flow Index
Global Financial Stress Index
Schroder ISF European Total Return Are there short term risks to market performance?
BofAML Global Financial Stress Index1
Are different asset classes pricing in different probabilities of risks and returns?
How do we quantify the “size” of the stress we feel?
What are market participants prepared to pay for protection against extreme events?
How are people positioned?
1Source: Bank of America Merrill Lynch. Bloomberg ticker: GFSI Index
European Equity capabilities | April 2013 16
Standard Deviation MSCI Europe rebased to 100 Jan 2008
Schroder ISF European Total Return What is the current level of stress in the market and how is it changing?
Source: Bank of America Merrill Lynch. Bloomberg ticker: GFSI. As at 5th April 2013.
European Equity capabilities | April 2013 17
40
60
80
100
120
140
160
180
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Ja
n 0
8
Mrz
08
Ma
i 0
8
Ju
l 08
Sep
08
Nov 0
8
Ja
n 0
9
Mrz
09
Ma
i 0
9
Ju
l 09
Sep
09
Nov 0
9
Ja
n 1
0
Mrz
10
Ma
i 1
0
Ju
l 10
Sep
10
Nov 1
0
Ja
n 1
1
Mrz
11
Ma
i 1
1
Ju
l 11
Sep
11
Nov 1
1
Ja
n 1
2
Mrz
12
Ma
i 1
2
Ju
l 12
Sep
12
Nov 1
2
Ja
n 1
3
Mrz
13
GFSI WoW Change (LHS) GFSI (LHS) MSCI Europe (RHS)
Schroder ISF European Total Return
Are there long term risks to market performance?
Schroders’ Proprietary Composite Valuation Indicator1
Valuation is one of the core determinants of long term market returns
Our index was created using intuitive fundamental data combined with statistical analysis. The
index is a blend of yield factors (earnings, dividend and government bond) and equity valuation
metrics (Price/Book, Price/Sales, Price/Cash flow)
Is the market expensive and more likely to trend down? Or the reverse?
1 The composite valuation indicator is a proprietary tool based on a number of common valuation metrics for the equity market, both relative to its own history and relative to other
asset classes
European Equity capabilities | April 2013 18
Schroder ISF European Total Return Valuation Indicators moving towards neutral
19 European Equity capabilities | April 2013
The composite valuation indicator is a proprietary tool based on a number of common valuation metrics for the equity market, both relative to its own history and relative to other
asset classes. Source: Factset, Bloomberg. As at 5th April 2013.
Standard Deviation MSCI Europe Index rebased to 100 Jan 2010
70
75
80
85
90
95
100
105
110
115
120
125
130
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Ja
n 1
0
Apr
10
Ju
l 10
Okt 1
0
Ja
n 1
1
Apr
11
Ju
l 11
Okt 1
1
Ja
n 1
2
Apr
12
Ju
l 12
Okt 1
2
Ja
n 1
3
Apr
13
CVI (LHS) CVI multiples (LHS) CVI yield (LHS) MSCI Europe (RHS)
EXPENSIVE
CHEAP
Schroder ISF European Total Return Significant rerating across countries
Source: Factset, Bloomberg. As at 22nd March 2013.
European Equity capabilities | April 2013 20
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
Dez 0
5
Mrz
06
Ju
n 0
6
Sep
06
Dez 0
6
Mrz
07
Ju
n 0
7
Sep
07
Dez 0
7
Mrz
08
Ju
n 0
8
Sep
08
Dez 0
8
Mrz
09
Ju
n 0
9
Sep
09
Dez 0
9
Mrz
10
Ju
n 1
0
Sep
10
Dez 1
0
Mrz
11
Ju
n 1
1
Sep
11
Dez 1
1
Mrz
12
Ju
n 1
2
Sep
12
Dez 1
2
European Italy Germany France UK Spain US
Standard Deviation
EXPENSIVE
CHEAP
Multiples
Schroder ISF European Total Return A multiple alone is not enough – what are the underlying growth assumptions?
Do underlying earnings expectations make sense, both in terms of year over year change and absolute level?
Are the risks to the upside or downside?
Source Morgan Stanley European Equity Strategy Gallery, April 2013
European Equity capabilities | April 2013 21
Schroder ISF European Total Return Summary
Builds on an excellent stock picking track record in European Equities and combines it with a
portfolio manager with multi asset experience
A consistently applied and robust investment process has been extended from stock selection to
include market risk
Flexible pragmatic approach with no inherent style bias
Sophisticated in-house portfolio construction tool SMART allows portfolio risk to be regularly
reviewed. All asset classes are dealt with in one place
European Total Return is large cap focused and therefore genuinely scalable
Transparency, daily liquidity and a simple flat fee structure with the reassurance of operating
under the Schroders and UCITS III umbrellas
European Equity capabilities | April 2013 22
Fund positioning and performance
Fund Performance Since 7th March 2012, fund inception, to COB 29th March 2013
Source: Bloomberg, Schroders. As at 29th March 2013. Fund returns based on ‘C’ class shares bid to bid, net of fees. Returns for ‘Equity portion’ are based on FactSe t attribution
data. *Inception of the portfolio was 7th March 2012
European Equity capabilities | April 2013 24
Since
inception (%)*
Fund +10.3
Benchmark +16.3
Relative -6.0
Ex- post annualised volatility
Fund 8.5
Benchmark 14.1
Fund Max Drawdown -6.3
Bmk Max Drawdown -12.8
Average net exposure 68.2
Participation 63.2
Equity Portion +20.5
Equity Relative +4.2
49%
60%
63%
90
95
100
105
110
115
120
Mrz 12 Mai 12 Jul 12 Sep 12 Nov 12 Jan 13 Mrz 13
Schroder ISF European Total Return (rebased to 100) MSCI Europe (rebased to 100)
-40%
-20%
0%
20%
40%
60%
80%
100%
Mrz 12 Apr 12 Mai 12 Jun 12 Jul 12 Aug 12 Sep 12 Okt 12 Nov 12 Jan 13 Feb 13 Mrz 13
Short Cash Net
.
Fund Positioning and Exposure Since 7th March 2012, fund inception, to COB 29th March 2013
European Equity capabilities | April 2013 25
% NAV
Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Long Equity 77.5 76.2 68.6 69.8 80.0 89.2 90.8 92.8 94.8 95.5 96.1 94.8 95.1
Cash 21.6 23.0 30.1 29.8 19.2 9.7 6.7 6.2 4.5 3.5 2.9 3.6 3.2
Other 0.9 0.8 1.3 0.4 0.8 1.1 2.5 1.0 0.7 1.0 1.0 1.6 1.7
Net
Exposure 67.9 69.5 61.7 64.6 69.1 70.7 58.0* 74.4 81.0 77.5 81.6 77.5 70.8
Source: Factset, Schroders. As at 29th March 2013. *Average net exposure in September was 66.9%.
.
% Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Since
inception*
Fund +1.7 +0.7 -4.0 +1.2 +4.1 -0.1 +1.1 +0.1 +1.1 -0.5 +1.9 +2.1 +0.7 +10.3
Benchmark +1.4 -1.7 -6.1 +5.2 +4.2 +2.0 +0.9 +0.7 +2.2 +1.4 +2.8 +1.0 +1.6 +16.3
Relative +0.3 +2.4 +2.1 -4.0 -0.1 -2.1 +0.2 -0.6 -1.1 -1.9 -0.9 +1.1 -0.9 -6.0
Contribution to return
Equity book +2.3 0.0 -5.0 +2.8 +3.9 +1.2 +1.8 +1.1 +2.2 +0.4 +2.9 +2.3 +0.2 +16.8
Overlay -0.3 +0.8 +1.2 -1.1 +0.2 -1.1 -0.4 -1.0 -1.0 -0.4 -1.1 +0.6 +0.3 -3.7
Other (fees &
timing) -0.3 -0.1 -0.2 -0.5 0.0 -0.2 -0.3 0.0 -0.1 -0.5 +0.1 -0.8 +0.2 -2.8
Equity
Equity portion +3.0 0.0 -6.6 +4.1 +5.3 +1.6 +1.9 +1.3 +2.4 +0.5 +3.1 +2.4 +0.2 +20.5
Equity relative +1.6 +1.7 -0.5 -1.1 +1.1 -0.4 +1.0 +0.6 +0.2 -0.9 +0.3 +0.3 -1.4 +4.2
Exposure
Net exposure 67.9 69.5 61.7 64.6 69.1 70.7 58.0** 74.4 81.0 77.5 81.6 77.5 70.8 68.2***
Participation 121.4 -41.2 67.2 23.1 97.6 -5.0 125.3 12.3 50.0 -35.7 67.9 210.0 43.8 63.2
Fund Performance Since 7th March 2012, fund inception, to COB 29th March 2013
Source: Bloomberg, Schroders. As at 29th March 2013. Fund returns based on ‘C’ class shares bid to bid, net of fees. Contributions to return and returns for ‘equity portion’ are
based on FactSet attribution data. *Inception of the portfolio was 7th March 2012. **Average net exposure in September was 66.9%. ***Average net exposure. The timing impact
relates to the fact that the Fund prices at 15:00 CET and the benchmark returns are close of business.
European Equity capabilities | April 2013 26
0.0%
0.0%
-3.7%
0.0%
-5.0%
-0.7%
0.0%
-7.8%
-5.6%
-1.0%
1.8 %
2.7 %
3.2 %
3.4 %
4.9 %
5.8 %
10.7 %
20.3 %
20.5 %
21.7 %
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
Portugal
Norway
Spain
Sweden
Italy
Netherlands
Switzerland
France
Germany
UK
-2.0%
-1.6%
-2.7%
-1.1%
-1.8%
-1.7%
-2.3%
-5.7%
-2.8%
-2.8%
1.1%
4.2%
5.5%
5.7%
6.1%
8.8%
9.7%
11.1%
18.4%
24.5%
-15%-10% -5% 0% 5% 10% 15% 20% 25%
Utilities
Telecommunication Services
Energy
Information Technology
Consumer Staples
Materials
Healthcare
Financials
Consumer Discretionary
Industrials
Overlay Exposure Equity Exposure
Fund Positioning 29th March 2013
27 European Equity capabilities | April 2013
Source: Factset, Schroders. As at 29th March 2013
0.0%
0.0%
-24.4%
0.0%
0.0%
70.8%
119.5%
1.7%
3.2%
95.1%
-100% -50% 0% 50% 100% 150%
Net exposure
Gross exposure
Options / Futures
Cash
Long Equity
Trading Activity Since Inception
European Equity capabilities | April 2013 28
Source: Schroders, based on largest trades placed between 7/03/2012 – 29/3/2013.
Stock Sector Country
BHP Billiton Materials UK
Carnival Cons Disc UK
Christian Dior Cons Disc France
Deutsche Telekom Telecoms Germany
Dufry Cons Disc Switzerland
GDF Suez Utilities France
GEA Group Industrials Germany
Hexagon Info Tech Sweden
Julius Baer Financials Switzerland
Legrand Industrials France
Pirelli Cons Disc Italy
PPR Cons Disc France
Richemont Cons Disc Switzerland
Safran Industrials France
Snam Utilities Italy
Syngenta Materials Switzerland
Xstrata Materials UK
Ziggo Telecoms Netherlands
New Buys Sell Outs
Stock Sector Country
Admiral Financials UK
Air Liquide Materials UK
BG Group Energy UK
Burberry Cons Disc UK
Deutsche Telekom Telecoms Germany
GDF Suez Utilities France
Hays Industrials UK
MAN SE Industrials Germany
Swedish Match Cons Stap Sweden
Symrise Materials Germany
Vallourec Industrials France
Vinci Industrials France
Xstrata Materials UK
Performance attribution Since Inception to 29th March 2013
Source: Schroders/Factset. As at 29 March 2013. Notes: Order is by absolute contribution to fund performance.
Currency: Euros. Based on average weights over the period
Stock Returns Absolute
Contribution
Relative
Contribution
Virgin Media +103.1% +1.9% +1.4%
Amadeus IT +55.0% +1.3% +0.8%
Kabel Deutschland +63.1% +1.2% +0.8%
Bayer +54.3% +1.2% +0.5%
Unilever +39.7% +0.9% +0.3%
Top 5 positive contributors Top 5 negative contributors
Stock Returns Absolute
Contribution
Relative
Contribution
Burberry -6.8% -0.4% -0.5%
Vallourec -22.2% -0.4% -0.3%
BG Group -23.0% -0.4% -0.1%
Swedish Match -12.2% -0.2% -0.5%
ING +15.7% -0.2% -0.3%
European Equity capabilities | April 2013 29
Overlay Detail Change in overlay since launch
Source: Schroders.
Overlay 07 March 2012 % Net 31 December 2012 % Net 31 March 2013 % Net
Options FTSE MIB Put -3.1 DAX Put -6.4 EURO STOXX 50 Put -4.0
CAC 40 Put -3.0 FTSE MIB Put -5.1 CAC 40 Put -2.9
DAX Put -2.7 CAC 40 Put -3.2 DAX Put -2.1
EURO STOXX 50 Put -2.6 S&P 500 Put -3.0 FTSE MIB Put -1.5
EURO STOXX 50 Put -0.3
Futures CAC 40 Future -3.2
IBEX 35 Future -3.0
FTSE MIB Future -3.0
EURO STOXX 50 Future -1.9
DAX Future -1.8
FTSE 100 Future -1.0
Total -11.4 -18.0 -24.4
European Equity capabilities | April 2013 30
31
Source: Schroders. As at 29th March 2013.
Months
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13
Average time to option expiry (months)
European Equity capabilities | April 2013
Overlay Detail Options expiry extended in time as number of near term catalysts has decreased
Market View
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Ju
n 1
2
Ju
l 12
Aug
12
Sep
12
Okt 1
2
Nov 1
2
Dez 1
2
Ja
n 1
3
Feb 1
3
Mrz
13
Eurozone GDP 2014f US GDP 2014f Italy GDP 2014f
Let’s start with the negatives…….Macro Growth remains elusive
33
Source: Bloomberg. As at 29th March 2013.
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Dez 1
1
Ja
n 1
2
Feb 1
2
Mrz
12
Apr
12
Ma
i 1
2
Ju
n 1
2
Ju
l 12
Aug
12
Sep
12
Okt 1
2
Nov 1
2
Dez 1
2
Ja
n 1
3
Feb 1
3
Mrz
13
Eurozone GDP 2013f US GDP 2013f Italy GDP 2013f
European Equity capabilities | April 2013
Survey data has been soft and that trend looks set to continue
34
Source: Bloomberg. As at 29th March 2013.
European Equity capabilities | April 2013
35
Peripheral funding rates are still painful
Interest rates on loans to non-financial corporates by country
European Equity capabilities | April 2013
Source: Reuters EcowinPro, BNP Pairbas.
Earnings momentum remains negative
36 European Equity capabilities | April 2013
Source: Merrill Lynch, BNP Paribas.
Near term valuations are neutral at best
Source: Factset, Bloomberg. As at 22nd April 2013.
European Equity capabilities | April 2013 37
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Dez 0
7
Mrz
08
Ju
n 0
8
Sep
08
Dez 0
8
Mrz
09
Ju
n 0
9
Sep
09
Dez 0
9
Mrz
10
Ju
n 1
0
Sep
10
Dez 1
0
Mrz
11
Ju
n 1
1
Sep
11
Dez 1
1
Mrz
12
Ju
n 1
2
Sep
12
Dez 1
2
European Italy Germany France UK Spain US
Standard Deviation
EXPENSIVE
CHEAP
Multiples
BUT……. Austerity is starting to work
38 European Equity capabilities | April 2013
The gap between the haves and have nots is narrowing
-6.12
-3.52
-1.89
-1.36
-1.12
0.31
5.36
8.55
9.21
11.73
-15 -10 -5 0 5 10 15
Greece Spain Portugal Ireland Italy
Germany France Belgium Austria Finland
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
De
z 9
7
De
z 9
8
De
z 9
9
De
z 0
0
De
z 0
1
De
z 0
2
De
z 0
3
De
z 0
4
De
z 0
5
De
z 0
6
De
z 0
7
De
z 0
8
De
z 0
9
De
z 1
0
De
z 1
1
De
z 1
2
Avg surplus countries (DE, NL, AT, FL)
Avg deficit countries (PIIGS)
Average current account balances in key areas Change (%) in current account balance 2007-12
Source: Bloomberg. As at 31st December 2012.
39 European Equity capabilities | April 2013
The disparity in labour costs is shrinking
Unit labour costs and nominal compensation per employee,
% chg
In 2012, the German union IG Metall bargained the highest
wage increase in 20 years
Jeremy Steins (Fed) feared bubble in credit markets – not yet
40 European Equity capabilities | April 2013
Source – Morgan Stanley US Fixed Income Strategy Insight.
Near term US rate hikes seem unlikely
41 European Equity capabilities | April 2013
US Inflation backdrop looks benign
Source: Torsten Slok Deutsche Bank Monthly Chart Book. April 2013.
US growth looks set to remain strong
42 European Equity capabilities | April 2013
Is the US capex cycle only just starting?
Source: Torsten Slok Deutsche Bank Monthly Chart Book. April 2013.
43 European Equity capabilities | April 2013
Impact of a housing recovery is only just beginning to be felt
Source: Torsten Slok Deutsche Bank Monthly Chart Book. April 2013.
Why do we spend so much time worrying about European growth?
Non European earnings are becoming increasingly important
44
Aggregate revenues in EUR for 460 listed European non-financial companies by reported destination of sales (from reported accounts), extrapolated for 2013-15.
Source: Redburn, April 2013
European Equity capabilities | April 2013
European Equity capabilities | April 2013 45
Annualised return from buying equities after GDP growth is ranked from lowest to highest 20%
12.0%
6.3% 6.8% 6.9%6.0%
0
5
10
15
Lowest Low Middle High Highest
1900-2005
%
Source: Dimson, Marsh & Staunton (ABN Amro/LBS); 53 countries maximum, only 17 countries have data over the entire sample period.
High GDP growth does NOT equal high equity returns
Graham & Dodd P/E for MSCI Europe vs S&P 500 and MSCI Asia-Pacific ex Japan
5
10
15
20
25
30
35
40
45
50
55
83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
MSCI Europe S&P500 MSCI Asia-Pac ex Japan
Source: UBS. Data as at 02 April 2013.
European Equity capabilities | April 2013 46
Valuation – which remains extreme
Long term equity returns are about:
47 European Equity capabilities | April 2013
And expectations, which look low
0
5
10
15
20
25
Mar 88 Mar 91 Mar 94 Mar 97 Mar 00 Mar 03 Mar 06 Mar 09 Mar 12
20
40
60
80
100
120
MSCI EMU 12m Fwd EPS (lhs) MSCI US 12m Fwd EPS (rhs)
Source: Thomson Reuters Datastream. As at 11 March 2013.
And are gradually improving in “cyclical “ sectors
48 European Equity capabilities | April 2013
Source: Thomson Reuters Datasteam. As at 29th March 2013.
90
95
100
105
110
115
120
125
Sep 12 Nov 12 Jan 13 Mrz 13
Consumer Staples Health Care Financials Materials
Performance, 30 Sep = 100
49 European Equity capabilities | April 2013
Source: BOFA Merrill Lynch Global Quantitative Strategy, MSCI.
It should be a good time to generate alpha
The wall of money seeking yield continues to grow
50
Source: Thomson Reuters Datastream, J.P.Morgan Cazenove. As at 5th April 2013.
75
80
85
90
95
100
Aug
11
Okt 1
1
Dez 1
1
Feb 1
2
Apr
12
Ju
n 1
2
Aug
12
Okt 1
2
Dez 1
2
Feb 1
3
JPY/USD spot rate
European Equity capabilities | April 2013
Japan reflation focus Average monthly Japanese purchase of foreign bonds (JPY bn/month)
Appendix
70
80
90
100
110
120
130
140
30
. N
ov 1
1
31
. D
ez 1
1
31
. Jan 1
2
29
. F
eb
12
31
. M
rz 1
2
30
. A
pr
12
31
. M
ai 1
2
30
. Jun 1
2
31
. Jul 12
31
. A
ug 1
2
30
. S
ep 1
2
31
. O
kt 12
30
. N
ov 1
2
31
. D
ez 1
2
31
. Jan 1
3
28
. F
eb
13
31
. M
rz 1
3
Italy Spain Germany France
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
07
. M
rz 1
2
23
. M
rz 1
2
13
. A
pr
12
04
. M
ai 1
2
25
. M
ai 1
2
15
. Jun 1
2
06
. Jul 12
27
. Jul 12
17
. A
ug 1
2
07
. S
ep 1
2
28
. S
ep 1
2
19
. O
kt 12
09
. N
ov 1
2
30
. N
ov 1
2
28
. D
ez 1
2
18
. Jan 1
3
08
. F
eb
13
01
. M
rz 1
3
22
. M
rz 1
3
Germany France Italy
Spain United States United Kingdom
Other
Schroder ISF European Total Return Example 1: Relative performance
European Equity capabilities | April 2013 52
Source: Thomson Reuters Datastream, Schroders. As at 31st December 2012.
% weight Performance, 30 Nov = 100
At launch DAX, CAC and MIB were evenly weighted: partly a function of all these markets having rallied
post LTROs.
Fund Launch
Date
“Whatever it
takes”
LTRO1
LTRO2
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
09.
Mrz
12
30.
Mrz
12
20.
Ap
r 1
2
11.
Mai 1
2
01.
Jun
12
22.
Jun
12
13. Jul 12
03.
Au
g 1
2
24.
Au
g 1
2
14.
Se
p 1
2
05.
Okt 1
2
26.
Okt 1
2
16.
No
v 1
2
07. D
ez 1
2
28.
De
z 1
2
18.
Jan
13
08.
Fe
b 1
3
01.
Mrz
13
22.
Mrz
13
Italy Germany. France Spain
EXPENSIVE
CHEAP
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
07
. M
rz 1
2
23
. M
rz 1
2
13
. A
pr
12
04
. M
ai 1
2
25
. M
ai 1
2
15
. Jun 1
2
06
. Jul 12
27
. Jul 12
17
. A
ug 1
2
07
. S
ep 1
2
28
. S
ep 1
2
19
. O
kt 12
09
. N
ov 1
2
30
. N
ov 1
2
28
. D
ez 1
2
18
. Jan 1
3
08
. F
eb
13
01
. M
rz 1
3
22
. M
rz 1
3
Germany France Italy
Spain United States United Kingdom
Other
Schroder ISF European Total Return Example 2: Relative valuation between countries
European Equity capabilities | April 2013 53
Source: Factset, Bloomberg. As at 31st March 2013.
% weight
DAX became our biggest short position. The market attached to it higher multiples relative to its European
peers due to Germany being perceived as relatively safer.
Std deviation
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
0
10
20
30
40
50
60
70
80
09
. M
rz 1
2
16
. M
rz 1
2
23
. M
rz 1
2
30
. M
rz 1
2
05
. A
pr
12
13
. A
pr
12
20
. A
pr
12
27
. A
pr
12
04
. M
ai 1
2
11
. M
ai 1
2
18
. M
ai 1
2
25
. M
ai 1
2
01
. Jun 1
2
08
. Jun 1
2
15
. Jun 1
2
22
. Jun 1
2
29
. Jun 1
2
06
. Jul 12
13
. Jul 12
20
. Jul 12
27
. Jul 12
03
. A
ug 1
2
10
. A
ug 1
2
17
. A
ug 1
2
24
. A
ug 1
2
31
. A
ug 1
2
07
. S
ep 1
2
14
. S
ep 1
2
21
. S
ep 1
2
28
. S
ep 1
2
05
. O
kt 12
12
. O
kt 12
19
. O
kt 12
26
. O
kt 12
02
. N
ov 1
2
09
. N
ov 1
2
16
. N
ov 1
2
23
. N
ov 1
2
30
. N
ov 1
2
07
. D
ez 1
2
14
. D
ez 1
2
21
. D
ez 1
2
28
. D
ez 1
2
ATM impl vol percentile - 1 year (lhs) Germany CVI - multiples (rhs)
Expensive valuation and high volatility
Schroder ISF European Total Return Example 3: Relative valuation between options and outright shorts
54
Source: Factset, Bloomberg. As at 31st March 2013.
Higher valuation levels provided a cushion to the risk of being squeezed out of an outright short position,
while option richness made volatility unattractive
Std deviation Percentile
Put reverse trade on
European Equity capabilities | April 2013
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
07
. M
rz 1
2
23
. M
rz 1
2
13
. A
pr
12
04
. M
ai 1
2
25
. M
ai 1
2
15
. Jun 1
2
06
. Jul 12
27
. Jul 12
17
. A
ug 1
2
07
. S
ep 1
2
28
. S
ep 1
2
19
. O
kt 12
09
. N
ov 1
2
30
. N
ov 1
2
28
. D
ez 1
2
18
. Jan 1
3
08
. F
eb
13
01
. M
rz 1
3
22
. M
rz 1
3
Germany France Italy
Spain United States United Kingdom
Other
10
20
30
40
50
60
70
80
90
31
. D
ez 0
7
30
. Jun 0
8
31
. D
ez 0
8
30
. Jun 0
9
31
. D
ez 0
9
30
. Jun 1
0
31
. D
ez 1
0
30
. Jun 1
1
31
. D
ez 1
1
30
. Jun 1
2
31
. D
ez 1
2
VIX
Schroder ISF European Total Return Example 4: Cheap implied volatility due to political catalyst
European Equity capabilities | April 2013 55
Source: Bloomberg, Schroders. As at 31st March 2013.
% weight
Initiated a short position in the S&P 500 as the VIX hit a 5 year low, meaning that volatility was very cheap by
historical standards
5 Year low
Schroder ISF European Total Return Example 5: Near term catalyst
56
Source: Factset, Bloomberg. As at 15th March.
Extended valuation combined with the Italian elections provided an attractive back drop
European Equity capabilities | April 2013
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
28
-Dez-2
012
04
-Jan
-201
3
11
-Jan
-201
3
18
-Jan
-201
3
25
-Jan
-201
3
01
-Fe
b-2
01
3
08
-Fe
b-2
01
3
15
-Fe
b-2
01
3
22
-Fe
b-2
01
3
01
-Mrz
-20
13
08
-Mrz
-20
13
15
-Mrz
-20
13
0
5
10
15
20
25
30
35
3 mth ATM implied volatility FTSEMIB (LHS) Italy CVI (RHS)
Elections
0
200
400
600
800
1000
1200
12000
13000
14000
15000
16000
17000
18000
19000
31
. D
ez 1
2
07
. Jan 1
3
14
. Jan 1
3
21
. Jan 1
3
28
. Jan 1
3
04
. F
eb
13
11
. F
eb
13
18
. F
eb
13
25
. F
eb
13
04
. M
rz 1
3
11
. M
rz 1
3
FTSEMIB Index (LHS) FTSEMIB 3/13 P16500 Index (RHS)
Bought
Reduced
Bought
Reduced
Elections
Percentile Std deviation Price Price
Schroder ISF European Total Return Bank of America Merrill Lynch Global Financial Stress Index
Source: BofA Merrill Lynch Global Financial Stress Index “Launching GFSI” 19th November 2010
European Equity capabilities | April 2013 57
Five asset classes and 40 sub components
Schroder ISF European Total Return Would the indicators have helped?
Buy/sell signals back tested
We created two model portfolios which could invest in two assets only: cash and the MSCI Europe
We increased or decreased our allocation to cash based solely on each indicators buy or sell signals
Source: Schroders, MSCI. As at April 2012
MSCI Europe rebased to 100 Jan 2000
European Equity capabilities | April 2013 58
40
50
60
70
80
90
100
110
120
Ja
n 0
0
Aug
00
Mrz
01
Okt 0
1
Ma
i 0
2
De
z 0
2
Ju
l 03
Feb 0
4
Sep
04
Apr
05
No
v 0
5
Ju
n 0
6
Ja
n 0
7
Aug
07
Mrz
08
Okt 0
8
Ma
i 0
9
Dez 0
9
Ju
l 10
Feb 1
1
Sep
11
Apr
12
Signal Portfolio CVI MSCI EUROPE Signal Portfolio GFSI
Fund positioning
29th March 2013
Source: Schroders. As at 29th March 2013.
%
Country Portfolio net MSCI Europe Relative
UK 20.7 34.3 -13.6
Germany 14.7 13.1 +1.6
France 12.5 14.0 -1.5
Switzerland 10.7 14.3 -3.6
Netherlands 5.0 4.3 +0.7
Sweden 3.4 5.1 -1.7
Norway 2.7 1.4 +1.3
Portugal 1.8 0.3 +1.5
Ireland 0.0 0.4 -0.4
Finland 0.0 1.2 -1.2
Italy -0.1 3.0 -3.1
Belgium -0.2 1.9 -2.2
Spain -0.5 4.3 -4.8
TOTAL 70.8 100.0 -29.2
%
Sector Portfolio net MSCI Europe Relative
Industrials 21.7 11.4 +10.3
Cons Disc 15.6 9.1 +6.5
Health Care 7.5 12.7 -5.2
Materials 7.0 8.8 -1.8
Financials 5.5 20.0 -14.5
Info Tech 4.7 3.1 +1.6
Cons Staples 4.3 15.6 -11.3
Energy 2.8 9.9 -7.1
Telecoms 2.6 5.5 -2.9
Utilities -1.0 4.0 -5.0
TOTAL 70.8 100.0 -29.2
European Equity capabilities | April 2013 59
.
%
YTD Since
inception*
Fund 5.12 4.78
Benchmark 5.69 6.76
Relative -0.56 -1.98
Equity portion 8.44 9.02
Equity relative 2.75 2.26
Average net
exposure 76% 69%
Participation 90% 71%
Model Portfolio Performance Since model inception on 31st October 2011 to COB 6th March
-250
-200
-150
-100
-50
0
50
100
150
200
250
85
90
95
100
105
110
115
31. O
kt 1
1
07. N
ov 1
1
14. N
ov 1
1
21. N
ov 1
1
28. N
ov 1
1
05. D
ez 1
1
12. D
ez 1
1
19. D
ez 1
1
26. D
ez 1
1
02. Ja
n 1
2
09. Ja
n 1
2
16. Ja
n 1
2
23. Ja
n 1
2
30. Ja
n 1
2
06
. F
eb
12
13
. F
eb
12
20
. F
eb
12
27
. F
eb
12
05. M
rz 1
2
Equity performance relative to MSCI Europe (RHS)
MSCI Europe
Model performance
60 European Equity capabilities | April 2013
Source: Schroders. *Inception of the model portfolio was 31st October 2011.
Performance rebased as at 31st of October 2011 Cumulative relative performance (bps)
Model Portfolio Net Exposure Since model inception on 31st October 2011 to COB 6th March
61 European Equity capabilities | April 2013
Source: Schroders.
Net Exposure MSCI Europe Rebased to 31st Oct 2011
70
75
80
85
90
95
100
105
110
115
120
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
31.
Okt 1
1
03.
Nov 1
1
08.
Nov 1
1
11.
Nov 1
1
16.
Nov 1
1
21.
No
v 1
1
24.
Nov 1
1
29.
Nov 1
1
02.
Dez 1
1
07.
Dez 1
1
12.
Dez 1
1
15.
Dez 1
1
20.
Dez 1
1
23.
Dez 1
1
29.
Dez 1
1
03.
Jan
12
06.
Jan
12
11.
Jan
12
16.
Jan
12
19.
Jan
12
24.
Jan
12
27.
Jan
12
01.
Fe
b 1
2
06.
Fe
b 1
2
09.
Fe
b 1
2
14.
Fe
b 1
2
17.
Fe
b 1
2
22.
Fe
b 1
2
27.
Fe
b 1
2
01.
Mrz
12
06.
Mrz
12
Net Exposure (LHS) MSCI Europe (RHS)
Commonality Select European Equity products
Source: PRISM. Comparisons are shown excluding cash as at 29th March 2013. Commonality is defined as number of stocks held in both portfolios as a proportion of the total.
European Equity capabilities | April 2013 62
Schroder ISF European Large Cap
Schroder ISF European Special Situations
Schroder European Fund
X
24%
47%
X
18% X
X
47%
32%
46%
Sc
hro
der
ISF
Eu
rop
ea
n T
ota
l
Retu
rn
Sc
hro
der
ISF
Eu
rop
ea
n L
arg
e
Cap
Sc
hro
der
ISF
Eu
rop
ea
n S
pec
ial
Sit
uati
on
s
Sc
hro
der
Eu
rop
ea
n
Fu
nd
Schroder ISF European Total Return
European style performance
63
Source: Schroders.
Factor rotation – quality outperforming again
Highlighted cells denote outperformance vs the market as well as Q5
Performance to 05 April 2013 1 Month 3 Mths 6 Mths
FTSE Europe -2.1% 0.1% 6.2%
STYLE Q1 Factor performance Qtl 1 Qtl 5 Q1-Q5 Qtl 1 Qtl 5 Q1-Q5 Qtl 1 Qtl 5 Q1-Q5
DY -1.4% -4.5% 3.1% 0.3% -1.7% 2.0% 4.8% 8.7% -4.0%
P/S -3.3% -0.9% -2.4% -5.0% 3.6% -8.6% 3.9% 5.4% -1.5%
P/B -5.5% -0.3% -5.2% -5.9% 2.7% -8.7% 3.8% 6.5% -2.6%
VALUE EV/EBITDA -2.2% -2.7% 0.5% -1.9% 0.6% -2.5% 4.4% 6.1% -1.7%
Earnings Yield -3.4% -3.2% -0.1% 0.8% -4.4% 5.2% 7.9% 3.5% 4.4%
FCF Yield -1.5% -0.9% -0.6% 1.0% -1.3% 2.3% 8.5% 4.4% 4.1%
IBES FY1 PE -3.7% -2.9% -0.7% -1.5% -2.0% 0.6% 3.3% 5.4% -2.1%
IBES FY2 PE -3.6% -1.2% -2.4% -4.8% 0.3% -5.1% 3.7% 3.5% 0.2%
IBES 3m % chg EPS est -2.9% -3.6% 0.7% 3.3% -6.2% 9.5% 10.0% 2.6% 7.3%
EARNINGS IBES 3m % chg FY2 EPS est -2.3% -4.8% 2.5% 2.4% -5.8% 8.2% 11.3% 0.3% 10.9%
MOMENTUM IBES EPS revisions ratio -1.3% -2.8% 1.5% 2.1% -2.9% 5.0% 6.9% 3.5% 3.5%
IBES FY2 EPS revisions ratio -0.7% -3.3% 2.6% 1.7% -0.5% 2.3% 7.7% 3.1% 4.6%
PRICE 30-90 MAV -3.1% -2.9% -0.2% -3.4% -1.9% -1.5% 3.1% 3.9% -0.7%
MOMENTUM 50-200 MAV -3.9% -1.0% -2.9% -3.7% -0.1% -3.5% 8.4% 2.6% 5.8%
ROE -0.6% -5.3% 4.7% 2.0% -4.3% 6.3% 5.9% 7.2% -1.2%
QUALITY ROA -1.1% -3.8% 2.8% 2.2% -2.6% 4.8% 6.7% 6.6% 0.1%
Debt/Eq -1.1% -2.8% 1.6% 1.5% 0.6% 0.9% 7.3% 6.3% 1.0%
1 yr sales growth -2.4% -2.1% -0.3% -1.6% 0.2% -1.9% 5.4% 8.8% -3.5%
3 yrs sales growth -3.5% -1.4% -2.1% -2.8% 2.9% -5.7% 4.7% 9.9% -5.2%
GROWTH IBES cons sales LTG -2.9% -2.4% -0.5% 0.5% -1.9% 2.4% 8.3% 2.6% 5.7%
IBES cons EPS LTG -2.5% -1.7% -0.8% 1.9% -3.1% 5.0% 9.9% 4.2% 5.7%
European Equity capabilities | April 2013
The views and opinions contained herein are those of Rory Bateman and Nicholette MacDonald-Brown, and may not
necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
Risk warnings: Investments in equities are subject to market risk and, potentially, to currency exchange rate risk. This fund may
use financial derivative instruments as a part of the investment process. This may increase the fund’s price volatility by amplifying
market events.
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 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.
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
presentation 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.
Source for ratings: S&P, as at 31 March 2013.
This presentation is issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and
regulated by the Financial Services Authority. For your security, all telephone calls are recorded
Important information
64 European Equity capabilities | April 2013