Schroder UK Alpha Plus Fund · Position sizing based on conviction level, risk-reward and liquidity Idea generation Research focus Portfolio construction Fundamental Thematic Quantitative

Marketing material for professional investors or advisers only. This material is not suitable for retail clients

Schroders Investment Conference 2018, Manchester

22 May 2018

#SICM18

@Schroders_UK

Bill Casey, Fund Manager

Schroder UK Alpha Plus Fund

Background and processSchroder UK Alpha Plus Fund

About us

2

Bill Casey, Fund Manager– Joined from Janus Henderson where he spent six

years as an Equity portfolio manager and research analyst for both long only and long-short funds

– Research responsibilities included coverage of European large and mid cap stocks. Bill was also the co-manager of the European Best Ideas Fund alongside John Bennett and laterally Nick Kissack

– Previously an Equity Analyst at Bank of America Merrill Lynch and Bradshaw Asset Management

– Investment career commenced in 2003– BSc Management (Finance) from Dublin Institute of

Technology– CFA Charterholder

Nick Kissack, Fund Manager– Joined from Janus Henderson where he spent four

years as an Equity portfolio manager and research analyst for both long only and long-short funds

– Previously portfolio manager at the Universities Superannuation Scheme with responsibility for both research analysis and portfolio management for the pan European equities portfolio

– Nick has worked as both a generalist (Clareville, Henderson) and a sector specialist (Consumer Staples & Discretionary at USS)

– Investment career commenced in 2004 at Clareville Capital Partners as a portfolio manager for the long-short Pegasus Fund

– Degree in Economics and Finance from the University of York

– CFA Charterholder


Fund Managers

Source: Schroders

Overview

3


Source: Schroders

Managers have 29 years’ combined UK & European Equities experience on both long-short and long-only mandates

We believe superior returns are generated by investing in resilient and well run companies which tend to outperform through cycles and over the long term

Market participants are increasingly impatient which provides opportunities for us to buy quality businesses at a discount to their intrinsic value

Bottom-up focused. Blend of thematic and stock specific investments

Evidence-based investing philosophy

More concentrated portfolio of ≈40 stocks

Investment style shift from value-bias to Quality at a Reasonable Price (QARP)

Larger capitalization bias – minimum market cap £1.5-2.0bn

The key pillars of our approach are threefold: Fundamental, Thematic and Quantitative

Our Fundamental process comprises detailed bottom-up analysis focused on quality at a reasonable price (QARP) – high returns, scarce business models and superior capital allocation

Thematic analysis is focused upon identifying key structural trends expected to be multi-year in duration. Value chain and capital cycle analysis are core to unearthing our investment themes

Our Quantitative model is based on a number of key factors (e.g. Quality, Valuation, Momentum) and has been extensively back-tested over long-term horizons

Difference vs. prior manager

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Source: Schroders

Investment style

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Source: Schroders

“Time is the friend of the wonderful business, the enemy of the mediocre” (Warren Buffett)

QARPQuality at a reasonable

price

ValuationReturns & cash flow

based

ReturnsFranchise, culture,

profitability

RiskBalance sheet, barriers to

entry

Deep value Expensive growth

Investment process – quality framework

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Value creation

– EVA through cycle ROIC > WACC

– High relative margins

– Strong cashflow

Capital allocation

– Capital Expenditure / R&D

– M&A – IRR discipline

– Balance sheet discipline

Market power

– Pricing power

– Cost leader

– Competitive advantage

Culture

– Innovation focused

– Alignment of incentives

– Cost focus

Fading qualityDisruption / mis-steps

Emerging qualityValue destroyers turned creators

Investment process

7


Source: Schroders

– Scarcity of franchise– Strong corporate culture– Capital allocation– Valuation

– Change & mean reversion– Value chain shifts– Capital cycle evolution– Support of 20 data scientists

– Multi-factor model– Screening & timing– Market regime indicators

Concentrated 40 stock portfolio with focus on bottom-up stock selection

Position sizing based on conviction level, risk-reward and liquidity

Idea generation Research focus Portfolio construction

Fundamental

Thematic

Quantitative

Investment process – idea generation

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Source: Schroders

Current portfolio

Universe

FTSE 350& selected Western Europe

stock universe

– QARP– Quant screens– Thematic fit– Company/analyst meetings– News & events

Watchlist20-30 stocks

– Company meetings – assess culture– Capital cycle/supply chain analysis– Evidence of change?– Valuation work

Pipeline– Further research/modelling– Timing - Quant– Accept/reject decision

4-5 stocks

Investment ideas– Execute ideas

New idea generation

Constant monitoring of investment case evolution and valuations

Constantly competing for

capital

Investment process

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Stock example: GlaxoSmithKline

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

– Core franchises strong– New CEO changing culture– Uncorrelated to economy– Priced for no growth

– Rising health awareness. Global oligopolies.

– Quality: High – Value: High cash flow yield– Momentum: poor but improving

Quality at a reasonable price

5.5% position is a large size for the fund given liquidity and conviction level


Fundamental

Thematic

Quantitative

Investment process

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Stock example: Smurfit Kappa


– Core franchises strong– Innovation leader– Uncorrelated to economy– Global oligopoly

– Sustainability & Ecommerce– Changing growth dynamics– Increasingly integrated value

chain

– Quality: Average / improving– Value: Good– Momentum: Average / improving


2.5% position is an average size for the fund given liquidity. Still building the position.


Fundamental

Thematic

Quantitative

Investment process

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Stock example: Smith & Nephew


– Core franchises strong– Technology leader– Uncorrelated to economy– Global oligopoly

– Ageing actives: people are living longer, and staying active.

– Quality: high– Value: average– Momentum: good

Quality & growth at a reasonable price

3.5% position is an above average size for the fund given liquidity and conviction level.


Fundamental

Thematic

Quantitative

Investment process

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Stock example: Hiscox


– Deep underwriting skill– Consistent high return on equity– Strong niche market positions

– Self employment propensity– Rising regulations/protections– Capital cycle starting to turn in

NC

– Quality: High – Value: Reasonable given returns– Momentum: Strong

Quality growth

2% position takes into account liquidity and beta.


Fundamental

Thematic

Quantitative

Update on portfolio changesSchroder UK Alpha Plus Fund

What has changed so far?

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Concentration and scalability

Source: StyleResearch, as at 11 May 2018. Cash not shown in portfolio weight by market cap chart

Number of stocks – fallen from 45 to 35 Portfolio weight by market cap – increased large cap

30

32

34

36

38

40

42

44

46

48

50

Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 1810

15

20

25

30

35

40

45

50

Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18Large Mid Small

%

How is the fund positioned now?

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Source: Bloomberg, data as at 11 May 2018.

Portfolio style skylines

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End January vs. now

Source: StyleResearch, 11 May 2018

End January

Now (11 May)

Thank you

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Marketing material for professional investors or advisers 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.

The views and opinions contained herein are those of Bill Casey and Nick Kissack, fund managers, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

The data contained in this presentation has been sourced by Schroders and should be independently verified before further publication or use. 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. Reliance should not be placed on the views and information in the presentation when taking individual investment and/or strategic decisions.

The statements contained in this document that are not historical facts are forward-looking statements. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which the Fund will operate, and Schroders' beliefs and assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and returns may differ materially from what is expressed or forecasted in such forward-looking statements.

Risk factors:The fund may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the fund, both up or down, which may adversely impact the performance of the fund.The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses.The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only.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.

Important information

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Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data.

Issued in May 2018 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. PEE01095

Important information

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.

schroders.com

Documents

Schroder UK Alpha Plus Fund · Position sizing based on conviction level, risk-reward and liquidity Idea generation Research focus Portfolio construction Fundamental Thematic Quantitative