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Investing in equities for income in a low return world
Thomas See, Head of Structured Fund Management
October 2013 | For professional investors or advisors only*Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation
Schroder ISF* Global Dividend MaximiserSchroder ISF European Dividend MaximiserSchroder ISF Asian Dividend Maximiser
USD3.9bn invested in Maximiser strategies
Schroders’ Maximiser fund rangeTested approach to generating income – range started in 2005
1Schroders' Maximiser range of funds | October 2013
Source: Schroders, All AuM as at 31 August 2013
Three UK AUTs 31/08/13
Schroder Income Maximiser Equity income portfolio investing predominantly in UK equities with covered call overlay $1,550.3m
Schroder Asian Income Maximiser Equity income portfolio investing in Asia (ex Japan) with covered call overlay $324.3m
Schroder Global Property Income Maximiser Globally diversified portfolio of property securities with covered call overlay $140.1m
Two SICAV funds
Schroder ISF European Dividend Maximiser European equity income portfolio (EUR denominated) with covered call overlay $479.8m
Schroder ISF Global Dividend Maximiser Global equity income portfolio (USD denominated) with covered call overlay $792.1m
Schroder ISF Asian Dividend Maximiser Equity income portfolio investing in Asia (ex Japan) with covered call overlay Recently launched
Two segregated mandates for wholesale distribution
Segregated mandates Global REIT portfolio with covered call overlay $298.8m
European equity portfolio with covered call overlay $261.8m
Multi-asset income fund with a monthly distribution (new)
Schroder Managed Monthly High Income Fund of funds investing 50% in Maximiser funds, 50% in fixed income funds $16.6m
Schroders’ Maximiser two-step strategyDistinctive, high yield funds with an attractive proposition and investor appeal
2
Two layers of fund management, but only one layer of fees
1 The gross target yield quoted is an estimate and is not guaranteed. Schroder ISF Asian Dividend Maximiser applies the same two-step approach but targets 7% p.a.2 Only some upside is sold, in order to preserve the potential for capital growth over the option term
Schroders' Maximiser range of funds | October 2013
7% (Asian) 8% (Global, European) target yield 1
Step 1 Step 2
Dividends from an actively managed equity income
portfolio c. 4.0%1 p.a.
Premium from selling covered call options2
c.4.0%1 p.a.+
Interest rates may stay low for more years than many think
Financial repression – cash is no longer ‘risk free’
3
A tax on savers and investors to subsidise public debt and economic recovery?
With negative returns after tax and inflation, is cash safe?
Will inflation spike? Path of least resistance to the fiscal debt problem?
Schroders' Maximiser range of funds | October 2013
Source: Schroders, forecasts for interest rates as at 30 September 2013Forecast risk warning: Please refer to the important information slide at the end of this presentation
Schroders’ interest rate forecast
End 2013 End 2014 How long ?
EUR 0.50% since May 2013 0.50% 0.50%
USD 0.25% since Dec 2008 0.25% 0.25% > 2015 ?
GBP 0.50% since Mar 2009 0.50% 0.50% > 2016 ?
0
2
4
6
8
10
12
14
16
1980
1981
1982
1983
1984
1985
1986
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
Germany UK US
Official policy is to depress short and long-term yieldFor risk averse investors, there are fewer opportunities
4Schroders' Maximiser range of funds | October 2013
Source: Datastream., as at 30 September 2013, 10 year government bonds. Forecast risk warning: Please refer to the important information slide at the end of the presentation
(%)
Schroders Global CPI Target 2014
loss making after inflation
quantitative easing
Not many fixed income securities across the globe offer yields above low single digits at the moment
1.8%0.7%
2.6%2.7%4.3%
7.0%
9.5%
0%
5%
10%
15%
20%
Gree
ce
Portu
gal
Spain
UK US
Germ
any
Japa
n
Schroders' Maximiser range of funds | October 2013
Bond yields are compressed across the quality spectrumHunt for yield is driving-up risk appetite
5
Corporate bond yields
Source: Thomson Datastream & Bloomberg. As at 30 September 2013, *BofAML, **Moodys
Global 10-year government bond yields
2.62%
2.20%
4.61%
4.77%
3.75%
5.36%
0% 2% 4% 6% 8%
Global Large Cap AAA*
Global Large Cap AA*
Corporate AA**
Corporate A**
Global Large Cap BBB*
Global High Yield BB*
Emerging market bond yields
Source: Schroders; Bloomberg; JP Morgan – Covering period 1992 to 30 August 2013
Schroders' Maximiser range of funds | October 2013 6
Yield %
Persistent cheap money has reduced returns everywhere
0
10
20
30
40
50
60
70
80
90Highest Yield
Lowest Yield
USD Bond Local Currency Bond Last Yield
Bul
garia
Chi
le B
road
Chi
na
Thai
land
Pola
nd
Rus
sia
Sou
th A
frica
Mex
ico
Per
u
Bra
zil
Turk
ey
Indo
nesi
a
Pola
nd
Per
u
Mex
ico
Hun
gary
Indi
a
Indo
nesi
a
Turk
ey
Rus
sia
Bra
zil
Ecua
dor
Mal
aysi
a
Col
ombi
a
Philip
pine
s
Pana
ma
Mal
aysi
a
Col
ombi
a
Ukr
aine
Vene
zuel
a
Sou
th A
frica
Arg
entin
a
Nig
eria
Current yield versus 10-year average
Equities still yielding near the 10yr averageCheap money and the hunt for yield is working its way across the asset classes
7Schroders' Maximiser range of funds | October 2013
Source: UBS, Bloomberg, MSCI. As at 26 June 2013
(%)
0
1
2
3
4
5
6
Europeandiv yield
USdiv yield
Asiandiv yield
A € corp bond yield (10y)
A $ corp bondyield (10y)
German 10 yrBund yield
US 10yr bondyield
German 3mrates (EUR
Libor)
US 3m rates(USD Libor)
Equities Corporate bonds Government bonds Money markets
Market contextHigh-dividend-yield stocks compared to high-yield bonds
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Dec
-90
Dec
-91
Dec
-92
Dec
-93
Dec
-94
Dec
-95
Dec
-96
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Yield of high-yield corporate credit vs. dividend yield of ‘quality’ high-yield stocks
Investors paying a premium for the safety of credit assets
9
The yield pickup of high-yield credit is close to record lows
Schroders' Maximiser range of funds | October 2013
Source: Bloomberg, Societe Generale, Schroder analysis. As at 30 September 2013. High-yield corporate credit is represented by the Merrill Lynch HY USD Corporate Bond Index. High-yielding stocks are represented by the Societe Generale Global Quality Income Index, which is available on Bloomberg as SGQINTR Index
Yield gap (%)
Source: Bloomberg, Societe Generale, Schroder analysis. As at 31 August 2013. High-yield corporate credit is represented by the Merrill Lynch HY USD Corporate Bond IndexHigh-yielding stocks are represented by the Societe Generale Global Quality Income Index, which is available on Bloomberg as SGQINTR Index
Schroders' Maximiser range of funds | October 2013 10
Default rate of high-yield corporate credit
Investors paying a premium for the safety of credit assetsDespite cyclical low default rates
Default rate (%)
0%
2%
4%
6%
8%
10%
12%
14%
16%
Dec
-90
Dec
-91
Dec
-92
Dec
-93
Dec
-94
Dec
-95
Dec
-96
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Source: Bloomberg, Societe Generale, Schroder analysis, as at 17 September 2013. Bond rating defined as average of Moodys, S&P and Fitch
11
Which investment has the better balance sheet?Very different asset backing
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
AA
A/A
aa
AA
+/A
a1
AA
/Aa2
AA
-/Aa3
A+/
A1
A/A
2
A-/A
3
BB
B+/
Baa
1
BB
B/B
aa2
BB
B-/B
aa3
BB
+/B
a1
BB
/Ba2
BB
-/Ba3
B+/
B1
B/B
2
B-/B
3
CC
C+/
Caa
1
CC
C/C
aa2
CC
C-/C
aa3
CC
/Ca
C/C
NR
/Oth
er
Merrill Lynch Euro High Yield 3% Issuer Constrained Schroder ISF Global Dividend Maximiser
Schroders' Maximiser range of funds | October 2013
Source: UBS. MSCI Europe dividend paid. As at 31 December 2011
Schroders' Maximiser range of funds | October 2013 12
Dividend income is resilientManagement teams avoid cutting dividends
-60%
-50%
-40%
-30%
-20%
-10%
0%1970s 1980s 1990s TMT 2009
Fall in Earnings Dividend cuts Dividend cuts ex financials
Dividend cuts vs. earnings cuts in five European recessions
Why invest for yield?To generate total returns!
High-yielding stocks out-performLong-term evidence from the UK
Cumulative value (log scale)
Based on UK equity market. Source: Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and updates by the authors in 2012.
Schroders' Maximiser range of funds | October 2013 14
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jun-
90M
ar-9
1D
ec-9
1Se
p-92
Jun-
93M
ar-9
4D
ec-9
4Se
p-95
Jun-
96M
ar-9
7D
ec-9
7Se
p-98
Jun-
99M
ar-0
0D
ec-0
0Se
p-01
Jun-
02M
ar-0
3D
ec-0
3Se
p-04
Jun-
05M
ar-0
6D
ec-0
6Se
p-07
Jun-
08M
ar-0
9D
ec-0
9Se
p-10
Jun-
11M
ar-1
2D
ec-1
2
Q1 Q2 Q3 Q4 Q5 Universe
814 9.5%*
High-yielding stocks out-performLong-term evidence from Europe
15
* Figures show the CAGR.Source: Factset. Schroder analysis. Data taken from constituents of FTSE World Europe and S&P Europe as at 30 June 2013. The data shows relative performance of the different yield quintiles of European stocks since 1989. Note that trading costs are not considered
Schroders' Maximiser range of funds | October 2013
1,242 11.6%*
630 8.3%*525 7.5%*
271 4.4%*196 3.0%*
Equity investment philosophy
We believe:
High-yielding stocks out-perform, long-term;
Focussing on the drivers of dividends, allows us to identify undervalued businesses;
High-yield equity strategies can outperform in different market environments. We are not bear-
market investors.
We aim:
To outperform the MSCI benchmark index by 300 basis points per annum, gross of fees over a
3-year rolling period;
To deliver gross dividend income 100 basis points above the index.
16Schroders' Maximiser range of funds | October 2013
Improving total returns by focussing on income
We are honest to our beliefsDiversification within the yield universe
17
Source: Bloomberg. Schroder analysis. European universe: European stocks over EUR 500m market capitalisation. As at 07 October 2013. Weights exclude cash holdings.
Schroders' Maximiser range of funds | October 2013
Schroder ISF European Dividend Maximiser fund weight by European market yield quintile (trailing 12 months) 80% of the Schroder ISF
European Dividend Maximiser is invested in the highest two quintiles of dividend yield
The Schroder ISF Global Dividend Maximiser invests 87% in the highest two quintiles of dividend yield
Lower yielding stocks are held for their dividend growth and total return potential
We will never own a stock without medium-term dividend potential; this means a potential yield of ~5% within 3-5 years.
2%3%
16%
34%
46%
1 2 3 4 5
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0.0%1.0%2.2%3.2%4.7%
Lowest trailing dividend yield within each quintile
Diversification within the yield universeHigh-dividend indices tend to be sector-concentrated
18Schroders' Maximiser range of funds | October 2013
Source: Thomson Reuters Datastream, Schroders. MSCI Europe High Yield data as at 30 September 2013. Schroder ISF European Dividend Maximiser data as at 30 September 2013.
Schroder ISF European Dividend Maximiser sector exposure %
MSCI Europe High Yield Index sector exposure %
23.8
14.3
12.74.67.62.2
8.2
16.4
9.7
Financials UtilitiesTelecommunication Services Consumer StaplesIndustrials MaterialsConsumer Discretionary EnergyHealth Care Information Technology
21.7
3.5
13.0
8.113.9
5.9
8.4
12.2
13.3
0.6
Sector exposure (%)
19Schroders' Maximiser range of funds | October 2013
Source: Schroders. Data shown for Schroder ISF European Dividend Maximiser. As at 30 September 2013, ex cash, ex options. *Relative to MSCI Europe.
Relative sector exposure (%)*
-5.8%
-3.3%
-2.2%
-0.9%
-0.5%
0.0%
0.9%
2.1%
2.8%
7.0%
-10% -5% 0% 5% 10%
Consumer Staples
Info Tech
Materials
Consumer Disc
Utilities
Financials
Health Care
Industrials
Energy
Telecoms
Over/Underweight
Diversification does not mean passivitySector exposure driven by fundamental valuation opportunities
21.7
3.5
13.0
8.113.9
5.9
8.4
12.2
13.3
Financials UtilitiesTelecoms Consumer StaplesIndustrials MaterialsConsumer Discretionary EnergyHealth Care Information Technology
We are not bear-market investorsThe underlying equity book has out-performed in rising markets
Schroders' Maximiser range of funds | October 2013 20
Source: Morningstar. Performance data is based on ‘A’ class shares, bid to bid, net of fees from the 30 November 2010 – 30 September 2013. *Ian Kelly took over portfolio management responsibilities for the fund on the 01/11/2010.
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13
= rising market
Relative monthly performance of Schroder ISF European Equity Yield versus MSCI Europe
Periods to 30 September 2013
Performance versus peersSchroder ISF European Dividend Maximiser & Schroder ISF European Equity Yield
21Schroders' Maximiser range of funds | October 2013
Source: Morningstar. Performance is based on bid to bid, net of fees. The broad peer group rankings are based on ‘A’ shares and are a combination of ‘Europe Equity Income’ ‘Europe Large Cap Blend’, ‘Europe Large Cap Growth’ and ‘Europe Large Cap Value’ funds, domiciled in Luxembourg. *The income peer group rankings are based on ‘A’ class shares and consist of ‘Europe Equity Income’ funds.*Income paid on distribution share class
Performance versus index in € % 1 year 2 years p.a. 3 years p.a. 5 years p.a. Income Paid*
Schroder ISF European Dividend Maximiser, A Acc +16.2 +21.2 +10.3 +6.8 8.0%
MSCI Europe Net TR +18.1 +20.2 +9.0 +6.8
Schroder ISF European Equity Yield, A Acc +20.6 +23.1 +11.4 +7.6 4.0%
Ranking versus income peers* 1 year 2 years p.a. 3 years p.a. 5 years p.a Income Paid*
Schroder ISF European Dividend Maximiser, A Acc 20 / 29 5 / 25 5 / 19 6 / 16 8.0%
Schroder ISF European Equity Yield, A Acc 3 / 29 4 / 25 3 / 19 4 / 16 4.0%
Periods to 30 September 2013
Performance versus peersSchroder ISF Global Dividend Maximiser and Schroder ISF Global Equity Yield
22
Source: Morningstar. Performance is based on bid to bid, net of fees in USD. The broad peer group rankings are based on ‘A’ class shares, Global Equity; Offshore and International Funds. *The income peer group rankings are based on ‘A’ class shares and consist of ‘Global Equity Income’ funds *Income paid on distribution share class
Schroders' Maximiser range of funds | October 2013
Performance versus index in US$ % 1 year 2 years p.a. 3 years p.a. 5 years p.a. IncomePaid*
Schroder ISF Global Dividend Maximiser, A Acc +10.1 +16.9 +9.2 +6.3 8.0%
MSCI World Net TR +20.2 +20.9 +11.8 +7.8
Schroder ISF Global Equity Yield, A Acc +11.6 +17.6 +9.7 +7.5 4.0%
Ranking versus Income peers* 1 year 2 years p.a. 3 years p.a. 5 years p.a. Income paid*
Schroder ISF Global Dividend Maximiser, A Acc 44 / 52 17 / 43 12 / 31 12 / 26 8.0%
Schroder ISF Global Equity Yield, A Acc 40 / 52 11 / 43 9 / 31 9 / 26 4.0%
Market context- What is the potential in high-yielding
stocks?
- Is a ‘dividend bubble’ forming?
Source: Factset, Societe Generale, Schroder analysis. As at 30 September 2013. Universe is constituents of FTSE World Europe Index Stocks are separated into quintiles based on 12-month trailing dividend yield. PE ratio is based on trailing earnings
PE ratio of European stocks in top quintile of dividend yield and market median PE
0
5
10
15
20
25
30
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Top quintile Market Median Top quintile Market Average
24Schroders' Maximiser range of funds | October 2013
No sign of a bubble in European high-yielding stocksHigh-yielding stocks still trading at attractive valuations
0
5
10
15
20
25
30
35
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Top quintile Market Median Top quintile Market AverageSource: Factset, Societe Generale, Schroder analysis. As at 30 September 2013. Universe is constituents of FTSE United States Index Stocks are separated into quintiles based on 12-month trailing dividend yield. PE ratio is based on trailing earnings
PE ratio of US stocks in top quintile of dividend yield and market median PE
25Schroders' Maximiser range of funds | October 2013
A dividend bubble might be emerging in the USHigh-yielded stocks have lost their P/E discount against the broader market
0
5
10
15
20
25
30
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Top quintile Market Median Top quintile Market AverageSource: Factset, Societe Generale, Schroder analysis. As at 30 September 2013. Universe is constituents of FTSE Asia Pacific ex Japan Index Stocks are separated into quintiles based on 12-month trailing dividend yield. PE ratio is based on trailing earnings
PE ratio of Asia Pac ex Japan stocks in top quintile of dividend yield and market median PE
26Schroders' Maximiser range of funds | October 2013
Asian high-yielding stocks still at a discountHigher growth reflected in higher valuations
Why have US investors driven valuations so high?US income investors are limited to a small universe
Source: Societe Generale, 30 August 2013.
Schroders' Maximiser range of funds | October 2013 27
0
10
20
30
40
50
60
70
80
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
UK US Japan Europe ex UK Asia ex Japan
Fraction of regional market capitalisation with a trailing dividend yield above 4%
5
10
15
20
25
30
35
40
45
50
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
MSCI Europe S&P500 MSCI Asia-Pac ex Japan
Broad equities look very attractiveAttractive total return potential, as well as income
Source: Thomson Datastream, UBS. Data until 19 August 2013
-10
-5
0
5
10
15
20
25
10–15 15–20 20–25 25–30 30–35
Graham & Dodd P/E MSCI Europe MSCI Europe 1 year average returns by starting G&D PE range 1980–2010
PE x
Schroders' Maximiser range of funds | October 2013 28
Fundamental valuation drives our regional allocationWe focus where there is greatest opportunity
Schroders' Maximiser range of funds | October 2013 29
-4.2%
-0.7%
2.4%
3.3%
-21.9%
25.3%
-40% -30% -20% -10% 0% 10% 20% 30%
North America
Japan
Asia/Pacific exJapan
UK
EmergingMarkets
Europe ex UK
Over/Underweight
Source: Schroders. Data shown for Schroder ISF Global Dividend Maximiser. As at 30 September 2013, ex cash, ex options. *Relative to MSCI World
Regional exposure (%)Relative regional exposure (%)*
31.5
43.8
11.7
4.64.9
3.5
North America Europe ex UK
UK Asia Pacific ex Japan
Japan Emerging Markets
Overweight European listings, not European growthTop 20 holdings: Schroder ISF Global Dividend Maximiser
30Schroders' Maximiser range of funds | October 2013
Top 20 holdings Weight (%) Analyst Grading FY1 P/E Yield (%)
Microsoft 3.7 1 12.5 2.7Legal & General 2.4 2 12.6 4.1Deutsche Telekom 2.3 N/A 17.3 6.5Prudential 2.2 2 14.5 2.7
Roche 2.0 2 15.9 3.0Mitsui & Co 2.0 1 6.6 3.0JPMorgan Chase & Co 1.9 2 9.1 2.5Repsol 1.8 2 11.0 5.0Hugo Boss 1.8 N/A 18.7 3.3
Time Warner Cable 1.8 3 17.5 2.3Sanofi 1.7 2 13.9 3.7Novartis 1.7 2 14.8 3.3Deutsche Boerse 1.7 N/A 15.4 3.8Deutsche Post 1.7 N/A 16.0 2.9
CNOOC 1.7 2 8.9 3.6General Electric 1.7 2 14.5 3.2Credit Suisse 1.6 1 11.2 0.4Daimler 1.6 2 11.5 3.8
LyondellBasell Industries 1.6 1 12.2 2.5International Paper 1.6 N/A 13.4 2.7
Source: Schroders/FactSet as at 30/09/13. P/E (FY1) and Yield sourced from FactSet as at 30/09/13. Averages use simple averages
Stock concentration
Number of holdings 72Top 10 holdings 22%Top 20 holdings 38%
Market cap split
Over $20 bn 73%$10 bn to $20 bn 14%$5 bn to $10 bn 5%$1 bn to $5 bn 8%
Characteristics of top 20
20% Graded 150% Graded 25% Graded 30% Graded 425% Not GradedAverage P/E 13.4Average Yield 3.3%
Schroders' Maximiser range of funds | October 2013
Source: Schroders/FactSet as at 30/09/13. P/E (FY1) and Yield sourced from FactSet as at 30/09/13. Averages use simple averages
High-yielding, international franchisesTop 20 Holdings: Schroder ISF European Dividend Maximiser
Top 20 holdings Weight (%) Analyst Grading FY1 P/E Yield (%)
Deutsche Telekom 4.7 N/A 17.3 6.5
Vodafone 4.7 1 14.2 4.7
Roche 4.3 2 16.9 3.0
Sanofi 3.8 2 13.9 3.7
Novartis 3.6 2 14.8 3.3Total 3.4 2 8.6 5.5BAE Systems 3.3 3 10.6 4.3
Reed Elsevier 3.1 N/A 15.2 3.2
Legal & General 3.1 2 12.6 4.1Ageas 3.1 N/A 9.7 4.0Statoil 3.0 1 9.2 5.0
Tesco 2.9 2 11.3 4.1Swedbank 2.7 1 11.8 6.6SNAM 2.6 N/A 13.6 6.7
ENI 2.6 3 11.9 6.4Wolters Kluwer 2.5 2 12.3 3.6BNP Paribas 2.5 1 10.9 3.0Saint-Gobain 2.5 N/A 19.4 3.4
Swiss Re 2.5 N/A 8.4 4.7DNB 2.4 1 9.9 2.3
Stock concentration
Number of holdings 49Top 10 holdings 35%Top 20 holdings 61%
Market cap split
Over €10 bn 70%€5 bn to €10 bn 18%€1 bn to €5 bn 9%Less than €1 bn 3%
25% Graded 135% Graded 210% Graded 30% Graded 430% Not GradedAverage P/E 12.6Average yield 4.4%
Characteristics of top 20
31
World leader in semiconductors
Slipped-up by focussing on processor speed instead of power-efficiency
Now focussing on power-saving: R&D budget is 50% of ARM market cap.
New Silvermont chips use half the power of previous generations
According to anandtech.com (May 6th 2013):‘it’s extremely likely that with Silvermont Intel will be able to drive down to far lower power levels than anything we’ve ever measured’
Net cash balance sheet
4% dividend yield, 10% ‘normalised’ FCF yield
Investment thesis
Our latest additionIntel
Source: Graph from Intel, 10 May 2012. Yield data Bloomberg, as at 06 September 2013
Schroders' Maximiser range of funds | October 2013 32
Equity conclusions
High-yielding stocks have out-performed over the long term; focussing on dividends directs us to profitable sections of the market
The high-yield stock universe has large sector concentrations, we are diversified
We are not bear-market investors, and have provided attractive capital returns, as well as income
We still see attractive valuations in Europe-listed high-yielding stocks, while US-listed high-yielding stocks look expensive
European equities are the also cheapest region globally on a cyclically-adjusted P/E, suggesting attractive totally returns, not just income
33Schroders' Maximiser range of funds | October 2013
Asian equities
Asian income opportunities in most markets2013E: Quartile distribution of dividend yield by country
35Schroders' Maximiser range of funds | October 2013
Source: JPMorgan, 12 August 2013Forecast risk warning: Please refer to the important information slide at the end of the presentation
0
1
2
3
4
5
Aus
tralia
Chi
na
Hon
g K
ong
Indo
nesi
a
Kore
a
Mal
aysi
a
Phi
lippi
nes
Sin
gapo
re
Taiw
an
Thai
land
Weighted average Median
(%)
20
30
40
50
60
70
80
90
100
0
5
10
15
20
25
30
35
40
05 06 07 08 09 10 11 12 13
Trailing earnings Dividend Payout (rhs)
Asian income – comfortable payout ratiosPayout ratios rose as earnings fell
36Schroders' Maximiser range of funds | October 2013
Source: Bloomberg, 30 June 2013
Foreign debt and equity holdings in Asia2
Expectations for Asian equities subdued – less so for bonds
0%
5%
10%
15%
20%
25%
30%
35%
Debt Equity
1 Source: MSCI, Citi Research, June 2013 2 Source: Emerging Advisors Group, June 2013
Foreign holdings (%, sample avg)
Asian outlook
-3.2
-2.4
-1.6
-0.8
0.0
0.8
1.6
2.4
3.2
-80
-60
-40
-20
0
20
40
60
80
92 94 96 98 00 02 04 06 08 10 12
MSCI AC Asia ex-Japan 6-m forward returnAsia ex-Japan Risk-love (RHS)
Citigroup Asian risk-love indicator1
Euphoric
Distress
Schroders' Maximiser range of funds | October 2013 37
0%20%40%60%80%
100%120%140%160%180%200%220%240%
Kore
a
Mal
aysi
a
Thai
land
Indo
nesi
a
Phi
lippi
nes
Vie
tnam
Indi
a 19
90
Kore
a
Mal
aysi
a
Thai
land
Indo
nesi
a
Phi
lippi
nes
Vie
tnam
Indi
a 19
90
Pre-Crisis Year 2012
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Vie
tnam
Thai
land
Mal
aysi
a
Phi
lippi
nes
Indo
nesi
a
Hon
g K
ong
Kore
a
Indi
a 19
90
Chi
na 1
993
Japa
n 19
89
Taiw
an 1
989
Sin
gapo
re
1995-96 2012
Foreign debt metrics (select crisis countries) Current account balance as % of GDP
Most of Asia looks in good shape to weather stormsAsian outlook
Source: DSG Asia, May 2013
370% 1990 695% 1990
External Debt as % Goods & Services Exports
Short Term External Debt as % FX Reserves
Schroders' Maximiser range of funds | October 2013 38
Portfolio by geography Portfolio by sector
Schroder ISF Asian Dividend Maximiser PortfolioDiversified portfolio by geography and sector
39Schroders' Maximiser range of funds | October 2013
Source: PRISM, as at 30 September 2013, based on un-audited data*Thailand, Indonesia, PhilippinesThe above is for illustrative purposes only and is not a recommendation to buy or sell
Australia 26.0% New Zealand 1.1% HK/China 28.7%
South Korea 6.6% TIP* 8.6% Malaysia 0.9%
Taiwan 13.3% Singapore 11.7% Cash 3.1%
Real Estate 15.1% Banks 15.5%Other Financial 3.9% Consumer Disc 6.4%Telecoms 13.8% Health Care 0.0%Consumer Staples 1.2% Materials 10.8%Energy 3.5% Industrials 13.8%Information Technology 12.9% Utilities 0.0%Cash 3.1%
Malaysia and TIP* not overwritten
VolatilitySo why are investors cautious about equities?
Source: Global Financial Data, Thomson Datastream, Schroders, 31 December 2012
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
20112007200519941992198719841978197019601956194819471923191619121911190619021899189618951892188918881882188118751874
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
20112007200519941992198719841978197019601956194819471923191619121911190619021899189618951892188918881882188118751874
1894
Schroders' Maximiser range of funds | October 2013 41
The challengeUnderstanding and accepting equity volatility risk
Distribution of US S&P 500 returns since 1870
1871
20102006200419931988198619791972197119681965196419591952194919441926192119091905190119001897188618781872
20102006200419931988198619791972197119681965196419591952194919441926192119091905190119001897188618781872
2012
1871
20102006200419931988198619791972197119681965196419591952194919441926192119091905190119001897188618781872
20102006200419931988198619791972197119681965196419591952194919441926192119091905190119001897188618781872
2012
-50 -40 -30 -20 -10 0 10 20 30 40 50 60Nominal % total return
Mean reversion – another way to address volatility?Investing for yield, value and quality plays to mean reversion
Source: Global Financial Data, Thomson Datastream, Schroders, 31 December 2012
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
2011200720051994199219871984197819701960195619481947192319161912191119061902189918961895
1894
1892188918881882188118751874
201020062004199319881986197919721971196819651964195919521949194419261921190919051901190018971886187818721871
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
-50 -40 -30 -20 -10 0 10 20 30 40 50 60Nominal % total return
2001
2000
20021974
1975
2003
1931
1930
42
2012
Schroders' Maximiser range of funds | October 2013
2012
Understanding and accepting equity volatility riskDistribution of US S&P 500 returns since 1870
Source: Global Financial Data, Thomson Datastream, Schroders, 31 December 2012
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
20112007200519941992198719841978197019601956194819471923191619121911190619021899189618951892188918881882188118751874
201020062004199319881986197919721971196819651964195919521949194419261921190919051901190018971886187818721871
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
-50 -40 -30 -20 -10 0 10 20 30 40 50 60Nominal % total return
2007
2008
2009
2010
2011
1894
Invest for longer periods to reduce the volatility of outcomes
1974
1973
1977
1978
1976
1975
43
20062005
2002
2003
2004
2001
2000
1999
1997
19981996
1995
1994
1993
2012
Schroders' Maximiser range of funds | October 2013
2012
Understanding and accepting equity volatility riskUnderstanding mean reversion
Source: Global Financial Data, Thomson Datastream, Schroders, 31 December 2012
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
20112007200519941992198719841978197019601956194819471923191619121911190619021899189618951892188918881882188118751874
201020062004199319881986197919721971196819651964195919521949194419261921190919051901190018971886187818721871
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
-50 -40 -30 -20 -10 0 10 20 30 40 50 60Nominal % total return
2007
2008
1894
44
fear?
the case for confidence?
This is NORMAL behaviour
Schroders' Maximiser range of funds | October 2013
The Maximiserstrategy
Schroders’ Maximiser strategyExchanging some uncertain potential gain for a regular income
Schroders' Maximiser range of funds | October 2013
Potential capital growth that is sold for upfront payment*
Initial equity value
We retain the first amount of potential capital growth
Dividend income: circa 4% p.a.**
Option premium: circa 4% p.a.**
8% yield p.a.**We repeat this process on a rolling 3 monthly basisThe repeated application of the overlay over three-monthly periods will increase the income paid to investors and reduce volatility, but there is the potential the performance or capital value may be eroded* Only some upside is sold, in order to preserve the potential for capital growth over the option period **The gross target yield quoted is an estimate and is not guaranteed. Please note, Schroder ISF Asian Dividend Maximiser targets a distributable income of 7% per annum.
46
100%100%
Sto
ck p
rice
Strike price
What can investors expect?
47Schroders' Maximiser range of funds | October 2013
1 This is the weighted average based on the individual strike prices if all stocks are overwritten. Maximum growth is an indication only, based on an equity market cycle, and may change.
Likely fund performance– Strongly rising stocks – likely to underperform– Gently rising, flat or declining stocks – potential to outperform
The strategy involves the repeated application of the overlay over three-monthly periods which will increase the income paid to investors and reduce volatility, but there is the potential the performance or capital value may be eroded
To get 8% income, maximum capital gain on any individual stock in the portfolio is expected to be around 10% on average1 per three-month option term across a market cycle –sacrificing some potential growth enables us to boost the income available
Schroder ISF European Dividend MaximiserA stable, enhanced yield with less volatility
Yield amount distributed per EUR 1,000 invested from 5/10/07, being launch date of Schroder ISF European Dividend Maximiser
Funds selection shown in the chart comprises: BNL Azioni Europa Dividendo; UniDividendenAss A; BNP Paribas Comfort Equity High Dividend Europe; Allianz RCM High Dividend Discount - A – EUR; Henderson Horizon Pan European Dividend Equity Fund; Deka-DividendValue Europa CF; Parvest Equity High Dividend Europe; 8. Dexia Equities L - Europe High Dividend; HI-DividendenPlus Europa-Fonds; Lyxor ETF DJ Stoxx Select Dividend 30; iShares DJ STOXX Select Dividend 30 (DE). Source: Bloomberg , as at 31 March 2013
48Schroders' Maximiser range of funds | October 2013
Example: Auction conducted 21 March 2013 for Schroder ISF European Dividend Maximiser
Risk controlSale of call options via competitive auction – we select the highest prices
No counterparty risk – cash settlement two days after trading
No leverage employed – we never sell potential upside unless we own the underlying stock
Source: Schroders, 31July 2013
Notional amount overwritten was 39.4% of NAV
Stock Counterparty A Counterparty B Counterparty C Counterparty D Price on expiry
Option premium
BNP Paribas 109.00% 110.70% 107.73% 108.00% 99.46% 1.80%
Solvay 107.30% 108.25% 106.51% 107.00% 99.95% 1.60%
Ageas 105.80% 105.45% 103.49% 105.50% 106.61% 1.60%
Swedbank 107.10% 107.43% 106.63% 108.25% 101.43% 1.20%
St Gobain 106.00% 106.80% 105.11% 106.00% 104.12% 1.80%
49Schroders' Maximiser range of funds | October 2013
Strike price set at 110.70% on 21/03/13 for 1.80% premium
The Maximiser overlayExample: BNP Paribas in Schroder ISF European Dividend Maximiser
Source: Schroders, share price up to 31 July 2013. Stock examples are for illustrative purposes only and are not a recommendation to buy or sell
Schroders' Maximiser range of funds | October 2013 50
Option expires without payment to counterparty
Stock purchased
The Maximiser overlayExample: BNP Paribas in Schroder ISF European Dividend Maximiser
Source: Schroders, share price up to 30 September 2013 Stock examples are for illustrative purposes only and are not a recommendation to buy or sell
Schroders' Maximiser range of funds | October 2013 51
21/3/13
The Maximiser overlayExample: BMW in Schroder ISF Global Dividend Maximiser
Source: Schroders, share price up to 30 August 2013 *Contributions based on portfolio return, calculated internally, unaudited and gross of fees, as at 30 August 2013. Stock examples are for illustrative purposes only and are not a recommendation to buy or sell
52
Stock purchased
Schroders' Maximiser range of funds | October 2013
Stock price capped by options in some trades during this year’s rally
Total equity return in 2013 so far (to 31 Aug) of 17%
Total contribution to portfolio performance in 2013 so far (to 31 Aug): +0.25%*
Contribution due to options in 2013 so far (to 31 Aug): 0.00%*
Source: Schroders, 30 September 2013, in EUR. The target yield quoted is an estimate and not guaranteed. *The yield is calculated by dividing the quarterly distribution by the unit price on the record date (which is the day prior to the ex-dividend date)Note: change of accounting date affects line end Q4 2011 and Q1 2012
Schroder ISF European Dividend Maximiser Income and price history – A Distribution shares
Price on record date* (EUR) EUR per unit
Distribution is a function of capital value
Schroders' Maximiser range of funds | October 2013 53
USD per unitPrice on record date* (USD)
Schroder ISF Global Dividend Maximiser Income and price history – A Distribution shares
Source: Schroders, 30 September 2013, in USD. The target yield quoted is an estimate and not guaranteed. *The yield is calculated by dividing by the quarterly distribution by the unit price on the record date (which is the day prior to the ex-dividend date).** Increased payment in March 2012 accounts for reduced payment in Q4 2011 as a result of a change in accounting date.
Distribution is a function of capital value
**
Schroders' Maximiser range of funds | October 2013 54
Comparable fund, Schroder Asian Income Maximiser, has delivered yield to target since launch
Schroder ISF Asian Dividend MaximiserTarget 7%1 distribution, payable monthly
Schroder ISF Asian Dividend Maximiser will distribute monthly– Monthly yield calculated as amount distributed per month divided by the price at the end of the month– Annual yield calculated as the simple sum of the 12 monthly yields
55Schroders' Maximiser range of funds | October 2013
Source: Schroders, 8 August 2013. 1 The target yield quoted is an estimate and not guaranteed. Price and distribution shown are for A Income units of Schroder Asian Income Maximiser. The yield is calculated by dividing the quarterly distribution by the fund price from the ex-dividend date at the beginning of the quarter. The annual yield is the simple sum of four quarterly yields. **Annualised – the first year only includes two payments covering the 7 month period from launch on 1 June 2010 to end December 2010.
0
1
2
3
4
5
6
0
10
20
30
40
50
60
70
Dec 09 Dec 10 Dec 11 Dec 12
Quarterly mid-price, GBP (lhs) ppu (rhs)
7.60%** 7.75% 7.50%
Pence per unit
Distinctive, high yield funds with an attractive proposition and investor appeal
Two sources of yield, independent of interest rates
Summary
56Schroders' Maximiser range of funds | October 2013
Equities, and European equities in particular, offer extremely attractive yields in comparison to other asset classes
Sale of some, but not all the potential upside on a rolling 3-month basis to obtain extra yield (>~110% depending on level of volatility)
Only potential upside of actual holdings is sold – the fund only ever sells what it owns
Competitive auction process, with no broker or extra fund management charges
No counterparty risk
Maximiser fund range started in 2005, now with USD 3.9 billion* under management
Distinctive funds with a high target yield
* As of 31 August 2013
AppendixVolatility - where does it come from?
Where does the volatility come from?Example: Proctor & Gamble
Source: Based on Bloomberg data, PG UN Equity, 31 December 2009 – 31 December 2011Securities shown are for illustrative purposes only and not a recommendation or buy or sell
US dollar
50
52
54
56
58
60
62
64
66
68
70
01/2010 04/2010 06/2010 09/2010 12/2010 03/2011 06/2011 09/2011 12/2011
Schroders' Maximiser range of funds | October 2013 58
4.0%3.5%3.0%2.5%2.0%1.5%1.0%
0.0%0.5%
-0.5%-1.0%-1.5%-2.0%-2.5%-3.0%-3.5%-4.0%
What exactly is volatility?Proctor & Gamble daily price changes
01/2010 04/2010 06/2010 09/2010 12/2010 03/2011 06/2011 09/2011 12/2011
%
Source: Based on Bloomberg data, PG UN Equity, 31 December 2009 – 31 December 2011
Schroders' Maximiser range of funds | October 2013 59
What exactly is volatility?Proctor & Gamble daily price changes
%4.0%3.5%3.0%2.5%2.0%1.5%1.0%
0.0%0.5%
-0.5%-1.0%-1.5%-2.0%-2.5%-3.0%-3.5%-4.0%
Source: Based on Bloomberg data, PG UN Equity, 31 December 2009 – 31 December 2011
Schroders' Maximiser range of funds | October 2013 60
-4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
A familiar pattern emergesProctor & Gamble daily price changes
%4.0%3.5%3.0%2.5%2.0%1.5%1.0%
0.0%0.5%
-0.5%-1.0%-1.5%-2.0%-2.5%-3.0%-3.5%-4.0%
Source: Based on Bloomberg data, PG UN Equity, 31 December 2009 – 31 December 2011
Schroders' Maximiser range of funds | October 2013 61
-4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
This is no coincidenceWe don’t have to wait 140 years to observe the emerging pattern
Source: Market data from Global Financial Data, Thomson Datastream, Schroders, 31 December 2012. Stock data: Bloomberg, PG UN Equity, 31 December 2009 – 31 December 2011
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
2011200720051994199219871984197819701960195619481947192319161912191119061902189918961895
1894
1892188918881882188118751874
201020062004199319881986197919721971196819651964195919521949194419261921190919051901190018971886187818721871
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
Schroders' Maximiser range of funds | October 2013 62
2012
The distribution stretches with timeBy trading small amounts daily you can trade the final outcome
Source: Global Financial Data, Thomson Datastream, Schroders, 31 December 2012
193120081937
20021974193019171907
20011973196619571941194019201903
1893189018841876
2000199019811977196919621953194619391934193219291914191319101887188318771873
20112007200519941992198719841978197019601956194819471923191619121911190619021899189618951892188918881882188118751874
201020062004199319881986197919721971196819651964195919521949194419261921190919051901190018971886187818721871
20092003199919981996198319821976196719631961195119431942192519241922191919181898189118851880
199719951991198919851980197519551950194519381936192719151904
19581935192819081879
19541933
-50 -40 -30 -20 -10 0 10 20 30 40 50 60Nominal % total return
1894
63
2012
Schroders' Maximiser range of funds | October 2013
Schroders’ Maximiser strategy
Step 2: Enhancing the yield by selling some of the potential upside
Source: Based on Bloomberg data, PG UN Equity, 31 December 2009 – 31 December 2012
Step 1: Investing in an actively managed equity portfolio for the asset return
A two-step strategy
64Schroders' Maximiser range of funds | October 2013
Drivers of recent Global equity portfolio performance
95
100
105
110
115
120
125
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
STXE 600 ($) STXE 600 € S&P 500
S&P 500 vs Stoxx Europe 600Divergence since end of January 2013
Schroders' Maximiser range of funds | October 2013
Source: Thomson Datasream. 30 September 2013. Information: Total Return index used.
66
100
102
104
106
108
110
112
114
116
118
120
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
MSCI World Schroder ISF Glbl Eq Yield A
Recent fund performance: Schroder ISF Global Equity YieldYear to date to 30 September 2013
Schroders' Maximiser range of funds | October 2013
Source: Morningstar. Performance data is based on ‘A’ class shares, bid to bid, net of fees, In USD.
67
Important InformationThe views and opinions contained herein are those of Thomas See and Ian Kelly, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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 document 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.
Any forecasts in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. 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.
Risk considerations:The capital is not guaranteed. The fund intends to make regular yield payments to investors and, if its income is insufficient to cover these payments, these payments may reduce the fund's capital. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The Fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The derivative strategy is applied repeatedly over three-monthly periods. This strategy will increase the income paid to investors and reduce the volatility of returns, but there is the potential the performance or capital value may be eroded.
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 (2013). “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.
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.
Schroders' Maximiser range of funds | October 2013 68