How can you get
7% return with
acceptable risk?
Schroders Insurance Asset Management
Investment Seminar 2014
Justin Simler | Head of Multi-Asset Product Management
November 2014 | For professional investors only. This material is not suitable for retail clients
Searching for sustainable income
Generating income in a challenging environment

The challenge an evolving environment presents for income seeking investors

A multi-asset approach to income investing

The outcome
*Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation
1
The challenge for
income seeking
investors
An over indebted developed world
Deleveraging to weigh on economic growth
US Debt as a % of GDP
450%
0.16
400%
0.14
350%
0.12
300%
0.10

Developed economies are
highly “leveraged”

We are in a deleveraging cycle

Low interest rates often persist
during periods of deleveraging
250%
0.08
200%
0.06
150%
0.04
100%
0.02
50%
0%
1920
0.00
1930
1940
1950
1960
1970
1980
1990
2000
2010
US Debt as a % of GDP (RHS)
US Short Term Interest Rates (3-Month Treasury Bill) (LHS)
Source: Federal Reserve Bank of St Louis at 31 December 2012. The opinions are those of the multi-asset team and are subject to change
3
Shifting demographics
An ageing global population
Population aged over 60 from 1950 – 2050
Millions
2,500
2,000
1,500

Global population is ageing,
particularly in developed
economies

Likely to boost demand for
income assets

Low interest rates often persist
during these demographic
shifts
1,000
500
0
1950
1975
2000
2025
2050
Sources: “World Population Ageing 1950 – 2050”, Population Division, DESA, United Nations. The opinions stated in this presentation include some forecasted
views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no
guarantee that any forecasts or opinions will be realised
4
The challenge facing income seeking investors
Declining purchasing power
Real interest rates are in negative territory

%
25

20
15
Interest
earned is
eclipsed
by rising
costs
10
5
0
-5
1971
1977
1983
US Inflation (yoy%)
1989
1995
2001
2007
US Interest Rates (%)
Source: Bloomberg, Schroders 1971 – 2013. US Inflation is represented by the CPI. US Interest Rates is represented by the Fed Funds rate
5
2013
A multi-asset
approach to
income investing
A multi-asset approach
Maximising the benefits of diversification and flexibility
Current yield and volatility of asset classes
Current yield (%)
7
EMD (Local FX)
Global High Yield Bond
6
Global Multi-Asset
Income Portfolio
5
EMD $
MSCI World High
Dividend Yield $
US 10 Year June 2007
4
Global Investment
Grade Bond
3
US 10 Year October
2014
2
1
0
0
2
4
6
8
10
Representative central bank target inflation rate
12
14
16
Volatility p.a.
Sources: Schroders, Datastream at 31 October 2014, volatility annualised standard deviation of five year monthly returns, DataStream Generic US 10 year, Global
Investment Grade Bond = Bank of America Merrill Lynch Global Credit (USD), Global High Yield = Bank of America Merrill Lynch Global High Yield Constrained
(USD), EMD$ = JPMorgan GBI–EM Global Diversified Composite (USD), EMD Local = JPM EMBI Global Composite, MSCI World High Dividend Yield (USD). Global
Multi-Asset Income volatility is indicative of the mid-value of the fund’s expected volatility range. See disclaimer for detail of the simulation methodology.
7
01/12/2014 17:52:24
Why multi-asset?
A multi-asset approach can reduce risk while maintaining yield
2007
Cash was sufficient
2014
Increase risk to obtain income
2014
With a multi-asset approach
3.7
1.2
1.8
4.1
4.4
25%
35%
20%
8.3%
20%
Yield: 5%
Portfolio volatility: 0%
36%
7.1%
100%
USD Cash
6.2%
Investment Grade
EM Debt $
EM Debt LC
High Yield Bonds
Yield: 5%
Portfolio volatility: 8%
8.6% 18.3%
Equity
EM USD Sovereign
Eur Investment Grade
Eur High Yield
Property
Municipal Bonds
US High Yield
EM Local Currency
US Investment Grade
EM USD Corporates
Infrastructure
Cash
Yield: 5%
Portfolio volatility: 4%
Sources: Schroders. 2014 data at 31 October 2014. Yields are per annum and portfolio volatility is over five years. LH chart: 3M USD Libor. Middle chart: Investment
Grade = BofA Merrill Lynch BBB Global Corporate Index, High Yield Bonds = BofA Global High Yield Index, EM Debt local currency = JPM EM GBI Broad Diversified
Index, EM Debt $ = JPM EMBI+ Index. The multi-asset solution is represented by Schroder ISF Global Multi-Asset Income (combination of static weight simulation
(up to 18 April 2012 – date of launch). Live performance/volatility used thereafter. Sectors mentioned are shown for illustrative purposes only and should not be
viewed as a recommendation to buy/sell
8
Extraordinary policy response
Central bank balance sheet expansion used to promote growth
Billion
Source: Schroders, Bloomberg at September 2014
9
Billion
The impact of a tightening cycle
Asset classes likely to deliver lower capital gains
Average monthly returns
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
MSCI EM
equities
S&P 500
JPM ELMI+
Barclays
US HY
Barclays
GSCI
US corp IG Commodity
12 months before rate tightening
US
3m cash
US 10-year
Treasury
bonds
JP EMBI
composite
12 months after rate tightening
Source: Bloomberg Schroders, at 25 March 2014. Most figures are calculated from total return indices in USD and based on data since 1976 (i.e. 7 rate hiking
cycles)
10
01/12/2014 17:52:24
Diverging economic and monetary cycles
Global rebalancing driving regional divergences
BUBBLE
CRUNCH
growth momentum fading, strong credit
growth for an extended time
slowing growth, rising defaults,
wide credit spreads
RELEVERAGING
STABILISATION
positive growth, M&A increasing, low
defaults, lending picking up
low growth, deleveraging,
defaults off the peak
Source: Schroders at November 2014
11
A multi-asset approach to income
What is required in a sustainable income approach?
Global

Take advantage of divergence in economic and monetary policy
Flexible

Manage risks and take advantage of prospective market volatility
Unconstrained

To focus on higher quality assets and valuation
Underpinned by a focus on quality to try to ensure income sustainability
12
Why global?
Global
To take advantage of opportunities wherever they exist
Average
yield (%)
Europe
4.9
Philip Morris


Czech yield 8.1%
P/E 12
International US
dividend yield of
5.0% P/E 16
North America
4.7
Verizon
Communications
Inc

Yield 4.5%

Raised dividend 9
consecutive years
South America
7.2
Natura
Cosmeticos

Yield 4.9%

Well managed
growth
Asia Pacific
4.7
Asustek Computer

6.6% dividend yield

Highly cash
generative
Africa
5.5
Truworths
International

Yield 5.5%

Excellent income
opportunity
Source: Schroders, Barra One at 31 October 2014. Securities mentioned are for illustration purposes only and should not be considered investment advice
13
Flexibility across and within asset classes
Flexible
Dynamic asset allocation and risk management since inception
% allocation
70
Years
5
60
4
50
40
3
30
2
20
1
10
0
0
Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14
US Investment Grade
Eur Investment Grade
High Yield Debt
40
30
20
10
0
Physical Equity
Source: Schroders, as at 31 October 2014
14
Net Equity
EMD
Duration (RHS)
Unconstrained approach to remove unwanted risks
Single asset classes can carry significant risk
Unconstrained
Hidden exposures
Schroder ISF Global Multi-Asset
Income
DJ Select Dividend
34.6% US utilities
1.1% US utilities
S&P International Dividend
15.5% Australian equities, 17.3%
telecoms
2.3% Australian equities, 8.0% telecoms
S&P EM Dividend
14.8% Chinese equities, 13.7%
Materials
1.0% Chinese equities, 4.5% Materials
iBoxx Global DM High Yield
16.5% CCC or unrated
4.2% CCC or unrated
iBoxx USD Liquid Investment
Grade
79.6% US bonds, 7.7 years of duration
20.5% US bonds, 3.7 years of duration
Source: Schroders, iShares, as at 31 October 2014
15
Schroder ISF
Global MultiAsset Income
Schroder ISF Global Multi-Asset Income
Summary
Investment Features

5%* distribution in monthly or quarterly payments

Estimated 7%** total return p.a. with a target realised volatility of 5–7% p.a. (maximum 10% p.a.)

Diversified, global sources of income

Directly invested and actively managed

Investment universe of 20 asset classes, 40 countries, 12 sectors and 25,000 securities
*The fund intends to make regular fixed distributions to investors and, if its income is insufficient to cover these payments, these payments may reduce the fund’s
capital
The target 5% distribution is formally reviewed on an annual basis. **This is a target only and is not guaranteed
17
01/12/2014 17:52:25
Investment philosophy
Generating sustainable income

How we strive for sustainability

Strong balance sheets and stable cash flows

Maximum 5% exposure to CCC

How we generate income
Quality
Global

Up to 20 asset classes

Universe of 25,000+ potential securities
Diversification
Schroder
ISF Global
Multi-Asset
Income
Unconstrained

Direct investments in liquid, listed securities

No loans or private equity
Liquidity
18
Flexible
Flexible
Investment process
A three step process
Asset allocation



Multi-Asset investment research and asset class
rating
Risk-adjusted yield optimisation
Propose asset allocation to Global Income
Committee
Equity
security selection



Fixed income
security selection
Security selection based on quality and yield
Unconstrained regional and sector exposure
Security level credit risk is actively managed
Risk management overlay



19
Alternatives
security selection
Investment research
Risk analysis and portfolio stress tests
Cost of protection
Step 1: Asset allocation process
Asset
allocation
Three phases leveraging on the global Multi-Asset team

Income committee sense-check optimisation to determine if asset allocation views fully expressed

Multi-Asset fund managers determine final asset allocation
1
2
3

Rate each individual asset class according to cyclical, valuation
sentiment and qualitative factors

Rating is used as a conditioner in the optimisation process

Aggregate scores condition a yield to risk optimisation process

Combined with portfolio investment guidelines, whilst biasing
towards favoured asset classes

Diversification across markets, regions and sectors

Flexible approach
Asset rating process
Identify best risk-adjusted
yields
Finalise asset allocation
Source: Schroders, for illustration purposes only. *The foundation for all Multi-Asset investments is the research carried out by the Strategic Investment Group
Multi-Asset (SIGMA)
20
Step 2: Equity security selection
Security
selection
Stock selection process

High income stocks
–
–

–
–

Attractively valued, high quality,
consistent payers
Avoid companies with weaker fundamentals
and high risk of cutting dividends
Sell stocks with unattractive valuation
and quality
Portfolio construction
–
–
Dividend Yield
4.5%
4.1%
Fund volatility
13.7%
13.4%
One Year Dividend
Growth
8.9%
6.0%
Price to Earnings*
13.8%
14.6%
Return on Equity
23.7%
21.1%
705
485
Universe of 15,000 stocks
Target companies with high, defendable yields or
potential for rising yields
Stock selection
–
Equity
portfolio
MSCI ACWI
High
Dividend
Yield
Bottom-up region and sector allocation
Diversified approach: Typically 500+ stocks
Number of holdings
Source: Schroders, 31 October 2014. *Trailing P/E. The data is a proportional aggregate combining the QEP and Custom Beta Equity portfolios.
21
Identify and manage downside risk
Risk
Management
Active risk management
RISK MANAGEMENT OVERLAY
3 drivers of protection combined with asset allocation
and security selection drive decision-making
Investment research
Risk analysis and
portfolio stress tests
Cost of hedging
Hedging risks
Equity
Interest rates
Portfolio
Source: Schroders at October 2014
22
Credit
Currency
Current allocation and yield by asset class
Top-down asset allocation and bottom-up security selection
Physical exposure (%)
Equity
36%
Fixed income
57%
Alternatives
5%
Cash
2%
Asset class
40
Yield
%
EM Local Currency
7.2
30
Eur High Yield
6.5
25
US High Yield
6.0
20
Property
5.5
15
EM USD Sovereign
5.3
EM USD Corporates
5.2
Infrastructure
5.1
US Investment Grade
4.9
Eur Investment Grade
4.8
Equity
4.6
Municipal Bonds
4.3
Fund yield*
5.2
35
10
5
Cash
Municipal Bonds
Infrastructure
Property
EM USD Corporates
Eur High Yield
US Investment Grade
Eur Investment Grade
EM Local Currency
EM USD Sovereign
US High Yield
Equity
0
Source: Schroders at 31 October 2014. The equity allocation represents the QEP portfolio and the equity indexing. It does not include put options with a deltaadjusted exposure of -3.7%, equity index futures of 0.0% or equity options of 0.1%. The investment grade allocation does not include duration futures held with an
exposure of 0.0%. *Yield is the next 12 months dividend yield using Schroders’ forecasts for the equities and using the current effective yield to maturity for the fixed
income; it is gross of withholding tax. Note that the breakdowns are subject to change
23
Performance
Total return since inception
Schroder ISF Global Multi-Asset Income
120
115
Annualised volatility
Global Multi-Asset Income 4.0%
110
105
100
95
90
Apr 2012
Oct 2012
Apr 2013
Oct 2013
Schroder ISF Global Multi-Asset Income
Schroder ISF Global Multi-Asset Income A Acc
US 10 Year
Apr 2014
Oct 2014
70/30***
1 month
%
Year to date
%
Since inception* p.a.
%
Yield**
%
1.4
4.3
6.9
5.2
Source: Datastream, Bloomberg at 31 October 2014, A Acc share class, net of fees. *Annualised performance since inception date of 18 April 2012. Volatility is
calculated using daily returns since inception. **Yield is the next 12 months dividend yield using Schroders’ forecasts for the equities and using the current effective
yield to maturity for the fixed income; it is gross of withholding tax ***70/30 reference is 70% JP Morgan GABI & 30% MSCI AC World
24
Sustainable income focus
Alternatives
Historical yield since inception
%
6
5
Fixed income
4
3
Equity
2
1
0
Apr 2012
Aug 2012
Equity
Dec 2012
Apr 2013
Investment Grade
Aug 2013
High Yield
EM Local
Dec 2013
EMD USD
Apr 2014
Aug 2014
Alternatives
Source: Schroders at 31 October 2014. Yield is the next 12 months dividend yield using Schroders’ forecasts for the equities and using the current effective yield to
maturity for the fixed income; it is gross of withholding tax. Note that the breakdowns are subject to change
25
Portfolio update
Focus on superior risk adjusted yields

Overall portfolio yield 5.2

Portfolio duration 3.7 years

Equity portfolio P/E: 13.8x

Average credit rating BB+
Asset class
Q/Q change* Update
Equity
Currently best opportunities in Europe, US and EM; reduced healthcare (esp
pharmaceuticals)
and increased telecoms
Fixed income
Reducing overall exposure in favour of equities
High yield
Volatility creating buying opportunities; prefer well-structured new issues
Investment grade
Names towards long-end; added new names in financials, preference for sterling over
euro names
EM
Reducing local currency and corporate bond exposure; focused on countries with solid
fundamentals, positive reform agendas or positive terms of trade
Alternatives
Slightly increased allocation to infrastructure while reducing exposure to
municipal bonds
Source: Schroders at October 2014. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. Note that these opinions are
subject to change. *Refers to changes within Schroder ISF Global Multi-Asset Income
26
01/12/2014 17:52:25
Multi Asset Income as a building block
Why we think it fits in a Lloyd’s portfolio

Allows you to capture the benefits of diversification and active asset allocation

Delivers return in the form of sustainable income

Complements a broader bond portfolio i.e. improves overall return and lowers risk
27
Important information
For professional investors only. This material is not suitable for retail clients
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 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.
Schroders has expressed its own views and opinions in this presentation and these may change The capital is not guaranteed. The fund intends to make regular fixed distributions to
investors and, if its income is insufficient to cover these payments, these payments may reduce the fund's capital. All equity forward sales are with a single counterparty. In case of
default, the relevant equities will be sold in the market and this may affect performance. Non-investment grade securities will generally pay higher yields than more highly rated
securities but will be subject to greater market, credit and default risk. A security issuer may not be able to meet its obligations to make timely payments of interest and principal. This will
affect the credit rating of those securities. 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. Investment in bonds and other debt instruments including related derivatives is subject to interest rate risk. The value of the fund may go down if
interest rate rise and vice versa. The fund may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate. The fund may be
leveraged by trading in a high volume of derivatives to achieve a risk target consistent with its risk profile.
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.
The forecasts included in this presentation 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.
Simulation: The simulation was calculated using a fixed weighting of 20% equity, 37.5% corporate bonds, 17.5% high yield bonds, 7.5% EM corporate bonds, 7.5% EM sovereign bonds
and 10% EM USD bonds. Transaction costs are not included. The calculation methodology for the equity and fixed income components are outlined below:
Fixed income :To calculate the fixed income element of this simulation we have used Barclays POINT to analyse a model portfolio composed of the fixed allocation in terms of risk
factors. This combination of risk factors is then used to estimate the price return series of the portfolio through time. We then added the average yield over the same period of the
standard indices of the fixed income components of the portfolio to obtain the total return series.
Equity: The simulation was calculated using QEP’s quantitative methodology using a global equity universe. The simulation constructs a portfolio of high quality high dividend payers,
using metrics such as interest coverage, free cash flow and price to earnings, whilst also focusing on value and avoiding dividend cutters. The simulation was constructed to meet a
minimum dividend yield of 2% in excess of the MSCI AC World High Dividend Index.
There could be no assurance that any transactions actually performed in a managed portfolio could have been executed at the times or prices used for the purpose of calculating the
performance in the simulation. No allowance was made in the model portfolio for transaction or advisory fees The actual performance of managed accounts is also impacted by nonquantitative factors such as additional stock selection and risk management activities of the portfolio management team. These factors cannot be modeled predictably and were not
used in preparing the underlying quantitative model or the simulated results. The simulated results are hypothetical results. They do not represent an attempt to show actual
performance. They are used only to illustrate the impact of an investment model. They cannot be used to reflect actual or expected managed portfolio returns.
Issued in November 2014 by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority.
INS03481
28