For professional investors and advisers only
Schroder ISF* European Value
Monthly Fund Update
Covering May 2017
Overview
European equities gained in May. The fund generated a return of 1.2% 1 while the MSCI Europe index returned 1.5%.
The market and the drivers of fund performance
The main individual detractor from fund returns during the month was mining company South32. The group announced that it has
had to suspend some coal operations in South Africa because of elevated gas levels, meaning it will miss its 2017 coal production
target. We view South32 as a well-diversified, quality mining business with a robust balance sheet.
Shipping firm D/S Norden saw its shares decline after first quarter results. Shipping is an industry with extreme cycles but goods still
need to be shipped around the world. D/S Norden has a strong track record in being able to match vessel charter costs with
revenues. We feel it has a decent balance sheet given the cyclicality of its industry.
Royal Bank of Scotland was another detractor for the month although there was limited fundamental newsflow driving the share
price. RBS had announced encouraging Q1 results in April that showed revenues growing while costs and impairments fell. ,
On the positive side, the leading individual contributors to fund returns in May were Russian oil & gas firm Tatneft and Greek
gaming company OPAP. Shares of the latter drew some support from signs of progress on Greece’s debt bailout.
Utility firm Societatea Nationala de Gaze Naturale (Romgaz) was another top contributor. Gas prices for retail customers in
Romania were liberalised as of April, creating scope for higher prices. The company also reported a well-received set of quarterly
results in May. We note that Romgaz has a very strong net cash balance sheet and a good record on cash conversion.
Telecoms group Orange Belgium also supported fund returns. The company had been among the main detractors last month after
its first quarter results showed a slight miss versus market expectations for mobile service revenues. However, costs remained under
control and the company reiterated its outlook for the full-year.
The market outlook and portfolio strategy
We initiated a new position in Deutsche Bank. The shares look cheaply valued relative to Deutsche’s banking sector peers. In recent
years there have been concerns about Deutsche’s solvency and that has weighed on the share price. However, those concerns have
been addressed and Deutsche now has a stronger capital position than many other investment banks. Litigation costs over past
conduct have also been a drag on the share price but we expect these to be less of an issue in future, with Deutsche settling the
RMBS litigation earlier this year. Deutsche’s return on equity is low but the cheap valuation compensates for this. Moreover,
management is taking steps to boost returns via restructuring and cost reduction. We also note that Deutsche has a high sensitivity
to interest rates and should benefit if there were to be a return to a more normal interest rate environment.
Another new position is emerging markets-focused bank Standard Chartered. It has suffered a difficult few years amid economic
weakness in emerging markets and needed a rights issue in late 2015. Lessons from the UK banks sector have taught us that a
banking recovery can take longer than expected but that, for each extra year to recovery, there is another year of pre-provision
profits to help ease the pain. We believe Standard Chartered is significantly undervalued at today’s levels, and there is potential for
considerable share price upside as impairments recede and income recovers.
We have sold out of Italian cable manufacturer Prysmian following share price gains. We also see a possible risk of future merger &
acquisition activity. We have also sold out of real estate developer Nexity.
Important Information: This document 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
1
Source: Schroders, A Acc NAV to NAV (bid to bid), net of fees.
*Schroder International Selection Fund is referred
to as Schroder ISF throughout this document.
Schroder ISF European Value
Covering May 2017
1
prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise
and investors may not get the amount originally invested. Schroders has expressed its own views and opinions in this document and these may
change. This document 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, communications may be taped or monitored. Risk Considerations: The capital is not guaranteed.
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. Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market
conditions, its ability to meet redemption requests upon demand. The fund will not hedge its market risk in a down cycle. The value of the fund will
move similarly to the markets. The fund may hold large positions in a particular investment and if market declines or the issuer defaults, then the fund
will be adversely affected. Third Party Data Disclaimer: Third party data is owned or licensed by the data provider and may not be reproduced or
extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The
data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com
contains additional disclaimers which apply to the third party data.
Schroder ISF European Equity Yield
Covering May 2017
2