Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Bay County Employees’ Retirement SystemSchroder Investment Management North America Inc.
June 2017For professional advisers only. This material is not suitable for retail clients
Matthew Dobbs, Head of Global Small Cap Equities, Portfolio Manager
Investment Philosophyand Team
– Stock selection primary source of value added– Growth and Quality, but at a reasonable price– Long-term time horizon– Strong risk framework– A fully resourced and focused team
Investment philosophy
2
The views and forecasts contained herein are those of the International Small Cap team and are subject to change.
– 20 specialists in international small company research and investment
– Core team of Lead Portfolio Manager and Regional Specialists have an average of 24 years investment experience and an average of 16 years tenure at Schroders
– Local presence and knowledge the key – primary research conducted out of Schroder research offices globally
– Team can draw on the broader Schroder focus list analysts –approximately 20% of holdings covered by focus list analysts
– Cross fertilization of investment ideas between regions and with Global Sector Experts
ResourcesInternational small cap team – A fully resourced and focused team
3
# = Number of years with Schroders. (#) = Numbers of years investment experience. Source: Schroders as of March 31, 2017. 131 December 2016. 2Located in London. 3Includes other coverage.
Lead Portfolio ManagerMatthew Dobbs 35 (35)
Small Cap Specialist – JapanTakuya Furutani 13 (22)
Small Cap Specialist – Pacific x JapRichard Sennitt2 23 (23)Paul Rathband 5 (25)
Small Cap Specialist – Pan EuropeJean Roche 1 (17)Andrew Lynch 18 (18)
Small Cap Analyst – JapanAndrew Rose2 35 (35)Ayumi KobayashI 12 (28)Kota Takahashi 4 (10)
Small Cap Analyst – Pacific x JapYoon Hee Kyoung 9 (17)Kim Young Roe 9 (18)Jacqueline Kuek 11 (16)Rebecca Xu 6 (6)Gina Kim Ji Yong 4 (17)Nina Chen 1 (7)
Small Cap Analyst – Pan EuropeAndy Brough 29 (29)Luke Biermann 10 (10)Iain Staples 5 (18)Hannah Piper 4 (6)Alexander Deane3 1 (6)
Focus List Analysts 91 Focus List Analysts 321 Focus List Analysts 141
Performance
–After an uncertain close to 2016, international small company stocks have performed well in the opening months of 2017.
–Smaller companies have also outperformed their large cap peers thanks to relative outperformance in all regions apart from Pacific ex Japan. Large cap stocks outperformance in Pacific ex Japan was led by more globally sensitive stocks in consumer cyclicals and information technology
–By sector, the strongest contributors to small cap relative outperformance were industrials and information technology. The only sectors to contribute negatively were consumer staples and real estate.
02468
1012141618202224
EAFE ContEurope
UK Japan Pacificex Japan
MSCI EAFE MSCI EAFE Small Cap
MSCI EAFE and MSCI EAFE Small Cap Index Performance in US$(%)2
PerformanceInvestment environment – YTD May 31, 2017
1Source: Schroders, S&P, MSCI, 31 May 20172Source: Schroders, MSCIPerformance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed
Year to date to 31 May 2017
5
S&P EPAC SmallCap Index vs. MSCI EAFE Index1
June 1989 = 100
70
80
90
100
110
120
130
140
150
89 92 95 98 01 04 07 10 13 16
Contribution from 3 months 6 months 1 year 3 years1 5 years1
Stock Selection +3.6 +2.6 +3.5 +0.6 +0.8
Region Allocation -0.1 -0.1 -0.1 -0.1 -0.2
Timing Residual -0.1 -0.5 -0.4 +0.2 0.0
Difference Relative to Fund Index +3.4 +2.0 +3.0 +0.7 +0.6
PerformanceSISCO2 - Bay County Employees’ Retirement System Value: US$ 33,186,183 as at 31 May 2017Inception date: June 30, 2006
1Annualized2Schroder International Small Companies Fund (SISCO). Performance based on JPMorgan NAV and is subject to fair value pricing adjustments applied in periods of elevated market volatility using an independent service. As the benchmark is not subject to this practice, artificial gaps between NAV and index performances can result.3Fund Index plus 150 basis points4S&P EPAC SmallCap to 12/31/2015, then MSCI EAFE Small Cap (NDR)Source: Schroders, S&P, MSCI, Factset PA2, gross of fees. Past performance is not an indication of future performance. Please see full disclosures at the end of the presentation
Performance to 31 May 2017 (in US$%)
Performance Attribution against Fund Index4
3 months 6 months 1 year 3 year1 5 year1 Since Inception1
SISCO (NAV)2 +13.7 +22.1 +19.7 +6.9 +14.7 +7.0
Bay County Index3 +10.7 +20.8 +18.2 +7.7 +15.6 +7.4
Fund Index4 +10.3 +20.1 +16.7 +6.2 +14.1 +5.9
SISCO2 vs Fund Index +3.4 +2.0 +3.0 +0.7 +0.6 +1.1
6
Performance and Performance Attribution3 months to 31 May 2017
1Schroder International Small Companies Fund (SISCO). Source: Schroders, S&P, MSCI, Factset PA2
7
Top 5 Active Contributors Top 5 Active Detractors3 months to May 31, 2017 3 months to May 31, 2017
Return (%) Contribution (%) Return (%) Contribution (%)Ubisoft Entertainment 51.4 0.36 Tokai Tokyo Financial -8.2 -0.22
MaireTecnimont 57.5 0.31 Sif Holding -12.2 -0.20
Van Lanschot 38.7 0.23 Shinmaywa Industries -21.9 -0.15
Sumitomo Real Estate 29.1 0.21 Digital Garage -5.2 -0.15
Ai Holdings 26.3 0.19 Arcs Company -4.3 -0.12
End Weight Total Return End Weight Total Return Stock Selection Regional Allocation Total Effect
UK 15.5 14.2 17.8 12.0 0.3 0.0 0.3
Continental Europe 41.4 20.6 40.8 16.3 1.6 0.0 1.6
Japan 27.3 8.2 30.3 5.3 0.9 0.2 1.1
Pacific ex Japan 6.9 12.4 11.1 1.7 0.8 0.4 1.2
Emerging Markets 6.7 5.2 - - - -0.4 -0.4
Cash 2.2 - - - - -0.3 -0.3
Residual - - - - - - -0.1
Total 100.0 13.7 100.0 10.3 3.6 -0.1 3.4
S&P EPAC SmallCap to 12/31/2015, then MSCI EAFE Small Cap (NDR)
SISCO1
Performance and Performance Attribution12 months to 31 May 2017
1Schroder International Small Companies Fund (SISCO). Source: Schroders, S&P, MSCI, Factset PA2
8
Top 5 Active Contributors Top 5 Active Detractors12 months to May 31, 2017 12 months to May 31, 2017
Return (%) Contribution (%) Return (%) Contribution (%)Logitech International 144.1 0.70 Digital Garage -18.8 -0.47
Lectra 99.2 0.50 ZEAL Network -24.4 -0.35
Sumitomo Real Estate 70.2 0.35 Kakaku.com -23.4 -0.34
RIB Software 76.1 0.34 Dunelm Group -39.8 -0.31
Bufab Holding 62.8 0.34 Arcs Company -8.5 -0.26
End Weight Total Return End Weight Total Return Stock Selection Regional Allocation Total Effect
UK 15.5 4.8 17.8 5.5 -0.2 0.2 0.0
Continental Europe 41.4 29.9 40.8 23.0 2.5 0.1 2.6
Japan 27.3 18.9 30.3 17.9 0.3 0.0 0.3
Pacific ex Japan 6.9 24.7 11.1 11.1 0.9 0.3 1.2
Emerging Markets 6.7 11.3 - - - -0.4 -0.4
Cash 2.2 - - - - -0.3 -0.3
Residual - - - - - - -0.4
Total 100.0 19.7 100.0 16.7 3.5 -0.1 3.0
S&P EPAC SmallCap to 12/31/2015, then MSCI EAFE Small Cap (NDR)
SISCO1
Fund1 risk characteristics
9
1Schroder International Small Companies Fund (SISCO). Source: Schroders Risk Report, Style Research, as at May 31, 2017Portfolio characteristics are subject to change and should not be viewed as an investment recommendation. Please see full disclosures at the end of the presentation.
As of 31 May 2017
Fund characteristicsSchroders1 vs. MSCI EAFE Small Cap index
10
1Schroder International Small Companies Fund (SISCO). Source: Schroders, Style Research, Factset
Schroders1 Index Schroders1 Index
No of stocks 201 2,207 Percentage>$3Bn 17.2% 21.9%
Free Market Capitalization US$M Percentage>$1Bn<$3Bn 39.1% 49.1%
Minimum 54 29 Percentage>$0.5Bn<$1Bn 29.3% 19.4%
Maximum 13,226 7,662 Percentage<$0.5Bn 14.4% 9.6%
Weighted Average 1,842 2,082 Total 100.0% 100.0%
Median 1,109 742
Valuation factors Schroders1 Index Valuation factors Schroders1 Index
P/E (12mo trailing) 17.1 16.8 3 Year Sales Growth 8.2 7.7
P/CF 13.3 11.9 3 Year Earnings Growth 20.8 17.7
P/BV 2.2 1.7 Dividend Payout Ratio 35.7 37.4
LT Debt/Capital 24.1 27.9 Dividend Yield 2.1 2.2
ROE 15.1 12.5
-3.2
-4.7
-2.3-0.1
7
3.3
-3.6 -4.1-2.8
1
7.2
2.3
-3-4.2
-2.3
0.6
6.7
2.2
-10
-5
0
5
10
Japan Pacific ex.Japan
UK ContinentalEurope
EM Cash
Fund¹ 09/30/16 Fund¹ 12/31/16 Fund¹ 05/31/17
Measured against Fund Index2
Investment strategy:Country weightings
11
1Schroder International Small Companies Fund (SISCO). 2S&P EPAC SmallCap to 12/31/2015, then MSCI EAFE Small Cap (NDR)Source: Schroders, S&P, MSCI. Regional weights are subject to change and should not be viewed as an investment recommendation. This slide contains the views of the International Small Cap Team. These views are subject to change and do not necessarily represent the views of Schroders
We remain modestly overweight continental Europe. We continue to see a good flow of attractive bottom up ideas, and the number of stocks rose over the quarter, with a focus on industrials. Economic conditions remain supportive, but progress in equity markets remains hampered by political concerns. The result of the Dutch elections was of some comfort, but there is a stiffer test to come in the form of the French presidential elections. However, this continues to mean many global investors remain underweight the region despite broadly benign fundamentals. Small cap valuations relative to large are modestly below long-term averages. Key over-weights by sector are industrials and information technology, balanced by underweights in health care and real estate.Remain underweight the United Kingdom. There is some valuation support for smaller caps (at least viz a viz largecap) but the macro economic situation continues to look fragile. This may seem odd given recent upgrades to growth forecasts, but this remains primarily a function of strong consumption and a buoyant housing market. Savings rates are back to ten year lows, and consumer debt has ballooned. There is little fiscal room to manoeuvre while the premature easing by the BoE last Summer leaves monetary policy of limited utility. Weaker sterling, however, supports exports and may spark inward investment and corporate activity. Fund remains underweight Japan. The macroeconomic backdrop is positive at least by Japanese standards. Manufacturing cycle is in a sweet spot given the uptick in global trade and low inventories. The weaker yen is another support aiding manufacturing earnings. Domestic conditions are more muted. Although the labor market is undoubtedly tighter, this has yet to translate to convincing household income growth. Other risks include policy missteps (premature tightening?), trade protectionism, and the political scandal surrounding PM Abe bears close monitoring. Corporate governance developments continue to be broadly encouraging, although investor expectations are high and many companies continue to cling to excessively lazy capital structures.The modest aggregate overweight to Pacific ex Japan and Emerging Markets masks the fact that the portfolio remains very underweight Australia. Key exposures elsewhere are HK/China, Taiwan, Korea and emerging ASEAN. China’s continued reliance on credit expansion to drive growth remains a major long-term issue to be addressed, but does not appear to present big near-term risks. Meanwhile, the successful engineering of domestic recovery (and a bit of inflation) and a recovery in corporate profitability can assuage some of the concerns over asset quality and the capital outflows. Geopolitical risk remains somewhat elevated, but the region is in good economic shape.
Overweight %
Underweight %
Fund1 weight % at 05/31/17
27.3 6.9 15.5 41.4 6.7 2.2
Index weight % at 05/31/17
30.3 11.1 17.8 40.8 – –
MSCI EAFE Small Cap Index as of 31 May 2017
Fund positioningCountry Sector Matrix
12
1Schroder International Small Companies Fund (SISCO). 2Cash 2.2%3Difference due to 2.2% cash weightingSource: Schroders, MSCI.
SISCO1 as of 31 May 2017
SISCO1 vs. MSCI EAFE Small Cap Index
TotalConsumer
DiscretionaryConsumer
Staples Energy Financials Healthcare Industrials IT Materials Real Estate Telecoms UtilitiesCont. Europe 40.8 4.7 2.2 1.2 5.1 4.1 9.7 4.4 3.0 4.2 0.9 1.2EM 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Japan 30.3 5.2 3.3 0.2 2.2 1.7 7.3 3.9 3.2 2.9 0.0 0.2Pacific ex Japan 11.1 2.1 0.5 0.3 1.0 0.8 1.5 0.8 1.6 2.1 0.2 0.3UK 17.8 3.7 0.7 0.7 2.6 0.8 3.9 2.1 1.3 1.5 0.1 0.3
Total 100.0 15.7 6.7 2.5 10.9 7.4 22.4 11.3 9.1 10.7 1.2 2.1
TotalConsumer
DiscretionaryConsumer
Staples Energy Financials Healthcare Industrials IT Materials Real Estate Telecoms Utilities
Cont. Europe 41.4 5.7 2.6 0.0 5.8 0.6 13.5 6.9 3.3 1.8 0.0 1.2
EM 6.7 2.1 0.2 0.2 0.2 1.2 1.4 1.1 0.4 0.0 0.0 0.0
Japan 27.3 3.7 2.5 0.0 1.1 1.6 9.1 4.4 3.9 1.1 0.0 0.0
Pacific ex Japan 6.9 1.5 0.5 0.0 0.2 0.8 1.2 1.1 1.0 0.6 0.0 0.0
UK 15.5 4.3 0.4 0.4 1.1 0.8 4.5 1.6 0.7 1.4 0.0 0.4
Total2 97.8 17.2 6.1 0.6 8.4 5.0 29.6 15.0 9.3 4.8 0.0 1.6
TotalConsumer
DiscretionaryConsumer
Staples Energy Financials Healthcare Industrials IT Materials Real Estate Telecoms Utilities
Cont. Europe 0.6 1.0 0.4 -1.2 0.7 -3.5 3.7 2.4 0.3 -2.4 -0.9 0.0
EM 6.7 2.1 0.2 0.2 0.2 1.2 1.4 1.1 0.4 0.0 0.0 0.0
Japan -3.0 -1.6 -0.9 -0.2 -1.2 -0.1 1.8 0.5 0.7 -1.8 0.0 -0.2
Pacific ex Japan -4.2 -0.6 0.0 -0.3 -0.7 0.1 -0.3 0.3 -0.6 -1.5 -0.2 -0.3
UK -2.3 0.6 -0.2 -0.4 -1.5 0.0 0.6 -0.5 -0.7 -0.2 -0.1 0.1
Total3 -2.2 1.6 -0.6 -1.9 -2.5 -2.4 7.3 3.7 0.2 -5.9 -1.2 -0.5
Recent Stock TransactionsSISCO1 – May 31, 2017
13
1Schroder International Small Companies Fund (SISCO). Source: Schroders
Significant New Buys since December 31, 2016 Significant Complete Sales since December 31, 2016Security Country Weight May 31, 2017 % Security Country Weight December 31, 2016 %Basic-Fit Nv Netherlands 0.6 Kuroda Electric Japan 0.9
Pola Orbis Japan 0.5 Sumitomo Real Estate Japan 0.6
Bingo Industries Australia 0.5 Modern Times Sweden 0.5
Prosegur Cash Spain 0.5 Groupe Eurotunnel France 0.4
Nifco Inc. Japan 0.4 Nien Made Taiwan 0.2
Nexity Class France 0.4 Stella International Hong Kong 0.2
Eddie Stobart United Kingdom 0.4 Finecobank Spa Italy 0.2
Huhtamaki Oyj Finland 0.4 Technogym S.P.A Italy 0.2
OCI NV Netherlands 0.3 Tikkurila Oyj Finland 0.2
China Biologic China 0.3 Samsonite International Hong Kong 0.2
SISCO1
Top ten holdings by region – 31 May 2017
14
1Schroder International Small Companies Fund (SISCO). Source: Schroders. Stocks held and weights are subject to change and should not be viewed as an investment recommendation. Regions are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.Source: Schroders
Europe UKCountry Security Weight in fund % % Country Security Weight in fund % %France Ubisoft Entertainment 1.4 3.5 UK Dechra Pharmaceuticals 0.8 5.2
France Spie Sa 1.3 3.1 UK DCC Plc 0.6 3.8
Ireland Dalata Hotel 1.3 3.1 UK Grainger Plc 0.6 3.6
Italy Anima Holding 1.2 2.9 UK Homeserve Plc 0.5 3.4
Italy YOOX Net APorter 1.1 2.7 UK SSP Group 0.5 3.4
Netherlands Van Lanschot 1.0 2.5 UK Auto Trader 0.5 3.2
Switzerland Logitech International 1.0 2.3 UK Elementis Plc 0.5 3.2
Switzerland Ascom Holding 0.9 2.2 UK Halma Plc 0.5 3.2
Italy Mairetecnimont Spa 0.9 2.1 UK Supergroup Plc 0.5 3.0
Switzerland Interroll Holding 0.9 2.1 UK Kennedy Wilson Real Estate 0.5 2.9
Total 11.0 26.5 Total 5.5 34.9
Japan Asia ex. Japan, Emerging MarketsCountry Security Weight in fund % % Country Security Weight in fund % %Japan Ai Holdings 1.5 5.3 Hong Kong Techtronic Industries 0.7 5.2
Japan Nippon Densetsu 1.2 4.6 Australia Iluka Resources 0.6 4.3
Japan Nihon Parkerizing 1.2 4.5 Australia Bingo Industries 0.5 3.6
Japan Tsuruha Holdings, 1.2 4.4 Australia Computershare Limited 0.4 3.2
Japan Daibiru Corporation 1.1 4.1 Australia Fairfax Media 0.4 3.2
Japan Hitachi Transport 1.1 4.1 Korea Medy-Tox Inc. 0.4 3.2
Japan Trusco Nakayama 1.1 4.1 Taiwan Chroma Ate 0.4 3.1
Japan Nippon Shinyaku 1.1 4.0 Korea S-1 Corp. 0.4 2.6
Japan Tokai Tokyo Financial 1.1 3.9 China China Biologic 0.3 2.5
Japan Nitta Corporation 1.1 3.9 Taiwan Gourmet Master 0.3 2.5
Total 11.7 42.9 Total 4.4 33.4
Investment Outlook and Strategy
Consensus forecasts are for continuation of muted global recovery, with around two thirds coming from emerging markets.
Some divergence in the inflation experience, and recent commodity and currency moves could see rising inflation in UK, Europe and Japan.
Interest rates continue to reflect the pro-active stance of Central Banks, although yield curves have been steepening.
Inventories generally very lean so end demand could have a powerful effect on industrial production
World GDP forecast1 Core inflation rates diverge as the US rises2
OverviewCould 2017 be the year of normalization?
1Source: Thomson Datastream, Schroders Economics Group, February 20172Source: Thomson Reuters Datastream, April 20173Source: BofA Merrill Lynch Global Research, Haver, Bloomberg, Schroder, Datastream. April 20174Source: Credit Suisse, Thomson Datastream. April 2017
16
Inventories have taken a cumulative 3p.p. off growth since Q2 20154
Global growth syncronising3
-2%
-1%
0%
1%
2%
3%
4%
Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16
US Eurozone Japan UK
-4-3-2-1012345
1990 1995 2000 2005 2010 2015
Inventory % point contribution to growth each quarter
2030405060708090
100
11 12 13 14 15 16 17Percentage of Countries (out of 29) with PMI >= 50
%
0.00.51.01.52.02.53.03.5
Jun
12
Oct
12
Feb
13
Jun
13
Oct
13
Feb
14
Jun
14
Oct
14
Feb
15
Jun
15
Oct
15
Feb
16
Jun
16
Oct
16
Feb
17
LTM EPS – MSCI EAFE Small Cap/MSCI EAFE
– Small caps offer reasonable value by historic standards based on cyclically adjusted PERs and Price to book value
– Compared to large cap peers, valuations are reasonable, but not particularly attractive in absolute terms
– Continued earnings momentum is critical
S&P EPAC SmallCap Index vs. MSCI EAFE Index1
June 1989 = 100
FY1 PE – S&P EPAC SmallCap minus S&P EPAC LargeMidCap2
Not extended on Price/Book Value3
EPS growth4
Index
Small Cap Valuations
17
1Source: Schroders, S&P, MSCI, 31 May 2017.2Source: Schroders, FactSet PA2, S&P, 31 May 2017.3Source: Schroders, S&P, 31 May 2017.4Source: FactSet MSCI. 31 May 2017.Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed.
708090
100110120130140150
89 91 93 95 97 99 01 03 05 07 09 11 13 15
S&P EPAC SmallCap vs. MSCI EAFE
-10
-5
0
5
10
89 91 93 95 97 99 01 03 05 07 09 11 13 15
FY1 PE – EPAC SmallCap minus EPAC LargeMidcap
0
1
2
3
89 91 92 94 95 97 98 00 02 03 05 06 08 10 11 13 14 16
S&P EPAC SmallCap Price/Book ValueAverage since 1989
– Amid all the noise (ECB policy settings/BREXIT), the euroland economy continues its solid expansion, with leading indicators and consumer sentiment remaining resilient.
– Loan growth has been positive for over a year, but remains relatively modest reflecting continued fragility of the banking system.
– Politics is likely to dominate near-term sentiment.
Leading indicators supportive1Consumer confidence steady and unemployment is falling2
Investment outlookContinental Europe
1Source: Thomson Datastream, Markit. Updated April 20172Source: Thomson Datastream. Updated April 20173Thomson Datastream, Updated April 2017 4Schroders Economics Group. As at 31 March 2017Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed
18
Political risk is here to stay4Loans 12mth % change3
6
8
10
12
14
-40
-30
-20
-10
0
06 07 08 09 10 11 12 13 14 15 16 17Euro Area Consumer Confidence (lhs)Europe Unemployment (rhs)
35
40
45
50
55
60
65
-6
-4
-2
0
2
4
6
06 07 08 09 10 11 12 13 14 15 16 17Eurozone GDP Growth Y/Y% (lhs)Markit PMI, Eurozone Composite (rhs)
-6
-4
-2
0
2
4
11 12 13 14 15 16 17Loans to non-financial corporationLoans to householdsLoans to private sector
Country Event risk Date Probability Market impact
France Presidential elections
23 Apr & 7 May 2017
Low Extreme
Germany Federal election
Aug-Oct 2017
Very low Extreme
Italy Italian snap election
Mid-17/ early 18
Medium High
– Reaction to Brexit pretty much instant. Small cap domestically focused names in particular sold off dramatically
– Growth forecasts sharply reduced –before being revised upwards
– Inflation expectations have risen and it remains to be seen how this will be handled by the consumer…and the Bank of England
– Both consumer and business measures fell sharply on the Brexitvote and then rebounded, and more recently business confidence has strengthened further whilst consumer sentiment trails somewhat
– The mixed news flow has meant that cyclically adjusted valuations are still near their long-term average
Investment outlookUnited Kingdom
Source: 1Thomson Datastream, Schroders Economics Group. Updated March 2017 2Thomson Reuters Datastream, Schroders Economics Group, May 2017 3Citi. May 31, 2017
19
FTSE 250 CAPE3
10
20
30
40
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17FTSE 250 CAPE Average
x
Domestic UK stocks sharply underperformed at first1
Sterling rises on the election announcement2
UK confidence indicators diverge2
1.2
1.3
1.4
1.5
Jun 16 Sep 16 Dec 16 Mar 17GBP/USD
90
92
94
96
98
100
102
104
48
49
50
51
52
53
54
Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17
Global Manufacturing PMI (lhs) Japan`s industrial production (rhs)
-0.3-0.2-0.1
00.10.20.30.40.5
Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17
Japan 10y GB Yield (%)
– 10 year bond yields finally creep into positive territory but yen still stronger than before NIRP introduced
– Despite a recent reversal, unprecedented premium for “defensiveness”
– Manufacturing growth driven by global cycle
– Signs of more independent voices in boardrooms. Small companies catching up with larger peers
Improving corporate governance4
Investment outlookJapan
1Source: Thomson Datastream, as at 25 April 20172Source: Daiwa Securities. March 31, 20173Source: Markit/JP Morgan, Citi Research, as at 31 March 20174Source: MUMSS, from TSE materials. Note preliminary figures for 2015
20
Bank of Japan is likely to maintain zero target for ten-year yield1
0
20
40
60
80
100
2006 2008 2010 2012 2014 2015
TSE 1 TSE 2
% of firms with outside directors by Market Type representing Large v.s. Small
Global manufacturing PMI and Japan`s industrial production 3
0.0
0.5
1.0
1.5
2.0
2.5
Apr07
Apr08
Apr09
Apr10
Apr11
Apr12
Apr13
Apr14
Apr15
Apr16
Apr17
Relative Price/Bk (Low Beta/High Beta)
Defensives expensive2
NIRPPolicy co-ordination
Trump
Points (CY2010=100)
– Concern over potential trade protectionism has impacted Asian exporters but economic data surprising on upside
– In China, stimulus and rising commodity prices have seen “old economy” growth improve but monetary conditions are now tighter
– Strong dollar historically a headwind but Asia’s external balances are improving significantly. Key issue is domestic credit expansion - different from 1997/98 crisis, but may make internal price adjustment more difficult
– Main underweight remains in Australia given valuations and commodity price impact
Investment outlookAsia ex Japan
1BofA Merrill Lynch Global Research, Bloomberg, Citigroup. March 31, 20172Bloomberg. Updated April 20173Thomson Datastream, Schroders Economics Group, 26 April 2017Countries and sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell
21
Chinese monetary conditions drive commodity demand2
Asia Pacific economic data surprising on upside1
Dollar strength has weighed on Emerging Markets3
0
100
200
300
400
500
600
-180
-130
-80
-30
20
70
2007 2009 2011 2013 2015 2017Asia Pacific economic surprises, LSMSCI Asia Pacific x JP price index, RS
60
70
80
90
100
110
1200.20.30.40.50.60.70.80.91.0
1991 1996 2001 2006 2011 2016US $ BROAD JAN 97=100 (FED) - EXCHANGE INDEX
Trade weighted USD, rhs, inverted
50
70
90
110
130
150
170
-40%
-20%
0%
20%
40%
60%
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Dec
12
Dec
13
Dec
14
Dec
15
Dec
16
CRB Commodity Index (% YOY change)
China Monetary Conditions*, pushed forward by 3m (RHS)
5
10
15
20
25
-13-9-5-137
1115
Jan 00 Jan 03 Jan 06 Jan 09 Jan 12 Jan 15
PPI (lhs) Nominal GDP (rhs)
China – Nominal GDP surges as deflationary pressures ease2
Investment process
– Regional Allocation
Investment processOverview
23
Source: Schroders as of 31 March 2017.
Quantitative Schroders Economic Team
International Small Companies Investment Committee
Matthew Dobbs and Regional PMs
Risk Measurement
Small Cap Regional Portfolio Managers
Small Cap Analysts
– Risk Management
– Stock Selection
Portfolio
Investment processStock selection
24
Source: Schroders as of 31 March 2017.
Fund Portfolio200 Stocks
Researched Universe 600 Companies
Schroder Universe 1,500 Companies
Total Universe 5,000 Companies
Screening– Liquidity– Factor Screens
Screening– Fair Value
Targets– Earnings triggers
– Individual Company Visits– Field Research– Proprietary Research
– Industry Analysis– Company Contact– Conferences
Screens weighted based on past performance:
Investment processFactor screens help define Schroder universe
25
Source: Schroders.The security information shown is for illustrative purposes, is subject to change, and is not a recommendation to buy/sell. Past performance is no guarantee of future results.The value of an investment can go down as well as up and is not guaranteed.
– Focus towards investments in quintiles 1 and 2 of the positive screen
– Aids identification of new ideas– Existing holdings monitored in screens as
ongoing check
Criterion Metrics
Growth EPS revisions
QualityAccruals ratioFCF ROAPiotroski F-Score
ValueDividend YieldFCF YieldPrice/Book
UK screen - March 31, 2017
Sedol Company NameCountry of Primary Listing
Free Cash Flow Yield
Free Cash Flow Yield (Fractiles)
FCF Return On Assets
FCF Return On Assets
(Fractiles) Piotroski ScorePiotroski Score
(Fractiles)Overall Screen
Rank
Overall Screen Rank
(Fractiles)Rank 3 months
agoRevisions
(Fractiles)Revisions Rank 3 months ago
B1FW50 Hochschild Mining plc UNITED KINGDO 12.90 1 #N/A NA 8 1 20.00 1 5 2 2080856 Morgan Sindall Group plc UNITED KINGDO 51.49 1 15.42 1 7 1 25.67 1 4 1 3B5TT18 Centamin plc UNITED KINGDO 14.30 1 17.74 1 7 1 29.00 1 1 2 4074482 KCOM Group PLC UNITED KINGDO 10.95 1 21.65 1 7 1 33.00 1 1 5 5068253 Persimmon Plc UNITED KINGDO 12.12 1 16.02 1 7 1 34.00 1 1 1 2087823 Taylor Wimpey plc UNITED KINGDO 10.62 1 11.20 1 8 1 35.00 1 2 1 2BTC0LB DFS Furniture PLC UNITED KINGDO 13.97 1 9.12 2 8 1 35.33 1 1 3 5075902 Fidessa group plc UNITED KINGDO 8.32 2 23.73 1 7 1 41.33 1 1 3 3B27YGJ Severfield plc UNITED KINGDO 11.50 1 8.39 2 8 1 42.33 1 1 2 3BYX91H JD Sports Fashion Plc UNITED KINGDO 6.90 2 19.38 1 8 1 43.67 1 1 3 2
Investment processStock selection
26
Source: Schroders as of 31 March 2017.
Fund Portfolio200 Stocks
Researched Universe 600 Companies
Schroder Universe 1,500 Companies
Total Universe 5,000 Companies
Quantitative Ranking– Liquidity– Factor Screens
Fundamental Ranking– Fair Value Targets– Earnings triggers
– Individual Company Visits– Field Research– Proprietary Research
– Industry Analysis– Company Contact– Conferences
Investment processWhat we look for in investments
27
Source: Schroders as of 31 March 2017.
Sustainable Growth
– High real EPS growth
– Visibility of earnings
– Strong product or service franchise
– Strong market share
– Beneficiary of structural change
– Limited financing risk
Management Assessment
– Interest in shareholder value
– Focused strategy
– Sound business practices
– Historic record of success
– Length of time with company
Quantitative Qualitative
Our methodology seeks to identify holdings that offer poor relative potential and in which conviction is lowThe decision to sell a position may be based on:– Position reaches fair value target price– Opportunity cost perceived in comparison to alternative investment– Fundamental deterioration makes original target price no longer appropriate
Investment processSell discipline
28
Source: Schroders as of 31 March 2017.
– Smallcap regional portfolio managers have primary responsibility for regional portfolio construction, but all stocks reviewed by team prior to purchase
– Regional and Sectoral weightings are reviewed by small cap team (ISIC) – Amend/confirm Regional Allocation targets– Ensure compliance with Risk/Return expectations– Avoid unintended biases (i.e. sector over-concentration)
– Supplemented by ongoing monitoring of overall portfolio by Matthew Dobbs
Investment processPortfolio construction – Overview
29
Source: Schroders as of 31 March 2017.
Investment processPortfolio construction – Building stock portfolios
30
Source: Schroders as of 31 March 2017.
ISIC Discussion
Portfolio Holding
Regional Team Discussion
Fundamental Investment CaseProcess
People – Analyst – Analyst– Regional Fund
Manager
– ISIC Team – Small Cap Regional Specialist
– Detailed Research– 1,500 Company Visits– Earnings Model
– Fair Value – Fair Value Review– Risk– Regional Weights– Sector Balance
– Execution oversight– Holding Size– Ongoing Review
Determine
Investment processPortfolio construction – Regional allocation
31
1Source: Schroders as of 31 March 2017.
Quantitative
Ranking of RegionsFavored Characteristics
Sector Focus
Small Cap Fundamentals
Valuation/Growth Fundamentals(Actual Portfolios)
Small Cap Fair ValuesFactor Screens Ranking Regions
Economics
Global backdropFundamental operating environment
Monetary cycle
International Small Cap Investment Committee (ISIC)1
Matthew DobbsRichard Sennitt
Jean Roche
Andrew LynchTakuya FurutaniPaul Rathband
Monitor
Sector AllocationRegional Allocation
PRISM brings together alternative risk measurement and management tools into a single report– Online– InteractivePRISM integrates both internal and external tools– Risk analysis– Characteristics analysis– Other statistical measuresThe PRISM Risk Report identifies active risk and the sources of risk by decomposing active portfolio positions into Stock Specific/Sector and Style factors
Investment processControlling portfolio risk
32
Source: Schroders as of 31 March 2017.
Overview Characteristics Stock Detail
Investment processPortfolio risk investment strategy manager – overview
33
The security and portfolio information shown is for a representative account within the MSCI EAFE Small Cap Composite. The information is intended to illustrate the risk management process and should not be viewed as a recommendation to buy/sell. See the Composite Disclosure and Performance information at the end ofthis presentation.
– Cash not to exceed 5% of the value of a portfolio– Stock weights: No formal limits, but generally between +/- 2% relative to the benchmark– Sector weights: No formal limits, but generally between +/- 7% relative to benchmark– Country weights: No formal limits, but generally between +/- 7% relative to the benchmark– Emerging Markets subject to client preference– Derivatives: Not used
Risk managementRisk management guidelines
34
Please note the benchmark will depend on the client preference i.e. S&P EPAC SmallCap, MSCI EAFE Small Cap etc.
The Schroder AdvantageWhy are we different?
35
As of 31 March 2017. The views and forecasts contained herein are those of the International Small Cap team and are subject to change.
Deep and experienced resources One of the largest teams devoted to researching the small cap universe
Local market knowledge ‘On the ground’ fundamental research
Disciplined investment process Combined top down and bottom up portfolio construction
Risk focus – PRISM Analysis A record of returns delivered with controlled volatility
Strong track record Outperformance over most timeframes
Portfolio ManagerMatthew Dobbs joined Schroders in 1981. Following 4 years in Research, Matthew has been involved in both global and specialised Pacific Basin portfolio management. He took overall responsibility for international and global SmallCap in 2000 having been, prior to that, Pacific ex Japan SmallCapspecialist, and has held a SmallCap role since 1996.
EuropeJean Roche joined Schroders in January 2016 as a member of the Pan European SmallCap team. Jean graduated with a first class honors MSc degree in Financial and Industrial Mathematics from Dublin City University, and BA Mathematics and French from National University of Ireland, Galway. She joined Morgan Stanley’s equity research department in 1999. Jean held senior research and analyst positions at HM Treasury, Arbuthnot Securities and Panmure Gordon, before joining Hargreave Hale (Marlborough Funds) as a fund manager in 2013. Jean is a CFA charterholder.Andrew Lynch is a Pan-European SmallCap specialist. He joined Schroders in 1998 having completed internships within the Schroder Group. He manages a mixture of institutional funds and unit trusts. Andy has a degree in Politics, Philosophy and Economics from Balliol College, Oxford.Andy Brough graduated from Manchester University with a Degree in Economics before joining Price Waterhouse where he qualified as a Chartered Accountant. He joined Schroders in 1987. He is Head of our UK Smaller Companies Fund Management Team. Andy has specialised in SmallCap. since 1987.Luke Biermann graduated from Bath University with a 1st Class Honours BSc degree in Computer Science. He joined Schroders in October 2006, and has joined the SmallCap team as an analyst.Iain Staples joined Schroders in January 2012 as a UK SmallCap analyst. He joined with thirteen years of prior experience as a UK equity analyst covering a wide range of sectors, and prior to that four years as a management consultant. He holds an MA degree in mathematics from Cambridge University, and a BSc from UMIST in Theoretical Physics.Hannah Piper joined Schroders in July 2012 as a Pan-European SmallCap Analyst. After graduating from Durham University with a BSc degree in Natural Sciences she joined Price Waterhouse Coppers where she qualified as a Chartered Accountant. Hannah joins us with 2 years investment experience most recently at UBS Securities where she was a top rated chemicals analyst.Alexander Deane joined Schroders as a smallcap equity analyst in September 2015, covering a range of Emerging Markets and Canada. He joins with five years investment experience, most recently as an analyst at Berenberg in London following UK capital goods companies. He is a Graduate of Nottingham University, and a Spanish speaker.
Biographies
36
JapanTakuya Furutani joined Schroders as a smallcap analyst in November 2003. He was formerly with Lombard Odier Darier Hentsch, and prior to that Commerz International Capital Management. His investment career commenced in 1994. He has a degree in Business Administration from Northeastern University, Boston.Andrew Rose is a graduate in Japanese and Politics, University of Sheffield and spent a year on a Japanese Government Scholarship to Kobe University to study International Economics. He joined Schroders in 1981 as an analyst, moving to Tokyo in 1984 for three years. Returning to London in 1987, he was responsible for Japanese equity investments for SIM UK and continental European clients. He was seconded to SIM (Japan) as Senior Investment Officer in 1996 with responsibility for Schroders’ Japanese equity and SmallCap policy. He has held his SmallCap responsibilities for 16 years.Ayumi Kobayashi joined Schroders in July 2004. She was previously an equity analyst with Yasuda Asset Management, and started her investment career in April 1990. Ayumi has a degree in law from Sophia University, an MBA from Insead and is a CMA.Kota Takahashi joined Schroders as a Japanese smallcap analyst in February 2013. His investment career commenced upon joining Goldman Sachs Asset Management in 2006 as a Japanese equity small cap portfolio manager, as well as covering machinery, and the Internet and Game sector as a sector analyst from 2008. Kota is a graduate of Keio University and is a CFA charterholder.
Biographies
37
Pacific ex. JapanPaul Rathband joined Schroders in August 2011 as an Asian Small Cap analyst based in Singapore. His investment career commenced in 1991 in Hong Kong with W.I. Carr Securities, covering Hong Kong, Singapore and Malaysian markets. He joined Schroders from RBS Asia Securities in Singapore, where he was Managing Director and responsible for Asia ex Japan research sales. Prior to RBS, Paul was at Arab Malaysian Securities based in Kuala Lumpur.Richard Sennitt joined Schroders in October 1993 as a Japanese analyst, and has managed specialist Asian equities since 1997. He joined the small cap team in December 2007. He is a member of the International Small Cap Investment Committee and Co-manager of Global Small Cap Funds. Richard is a graduate of Oxford University, an Associate Member of UKSIP and is a member of the CFA Institute.Yoon Hee Kyoung joined Schroders in 2007 as a smallcap analyst covering smallcap consumer and service stocks in Korea. She has had experience working in both securities and asset management companies in a research capacity. She holds a degree in Arts and Economics from the State University of New York.Kim Young Roe joined Schroders in April 2008 as an analyst covering construction, shipbuilding and infrastructure stocks in Korea. His investment analytical career started in 1999, and he has since held appointments in both domestic and foreign-owned securities companies. He has a BA degree from Seoul University.Jacqueline Kuek joined Schroders in December 2005 as an equity analyst with the Asia ex Japan team with responsibility for Singapore stocks. She became a member of the Global Smallcap team in June 2009. Her investment career commenced upon joining Morgan Stanley as a research analyst in 2000. She holds a degree in Accountancy from Nanyang Technological University, and is both a CFA Charterholder and a Certified Public Accountant.Rebecca Xu joined Schroders in June 2010 before transferring to Hong Kong in August 2011 to work as an equity analyst responsible for Chinese equity research. Her investment career commenced in 2009 with RBS where she was an investment banking analyst. She has a MPhil in Management from the University of Cambridge and a BA in Journalism and Communication from Tsinghua University. Rebecca joined the SmallCap Team as an analyst in September 2012.Gina Kim Ji Yong joined Schroders in Singapore in September 2012 as a SmallCap analyst. Gina has eight years of experience as a stock analyst, with four years of consulting prior to that. She is a graduate of Cambridge University, and a CFA charterholder.Nina Chen joined Schroders in March 2016 as an analyst based in Taiwan and is responsible for Taiwan SMID and Regional Textiles stocks. She joined Schroders from Nan Shan Life Insurance Company. Nina is a Bachelor of Economics from National Taiwan University and holds a MBA in International Trade from National Cheng-Chi University.
Biographies
38
Risks associated with International Small Companies: All investments involve risks including the risk of possible loss of principal. The market value of a fund’s portfolio may decline as a result of a number of factors, including adverse economic and market conditions, prospects of stocks in the portfolio, changing interest rates, and real or perceived adverse competitive industry conditions. Investing in foreign securities, may magnify risks due to changes in foreign exchange rates and the possibility of substantial volatility due to political and economic uncertainties in foreign countries. Investments in small capitalization companies generally carry greater risk than is customarily associated with larger capitalization companies, which may include, for example, less public information, more limited financial resources and product lines, greater volatility, higher risk of failure than larger companies, and less liquidity
The views and forecasts contained herein are those of the International Small Cap team and are subject to change. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions
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 realized
Past performance is no guarantee of future results. The value of an investment can go down as well as up and is not guaranteed
Important Information
Schroder Investment Management North America Inc.875 Third Avenue, New York, NY 10022-6225(212) 641-3800www.schroders.com/us
39
For Professional Investors only. Not Suitable for Private Customers
This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. 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 Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system
The returns presented represent past performance and are not necessarily representative of future returns which may vary. The value of investments can fall as well as rise as a result of market or currency movements. Exchange rates may cause the value of overseas investments and the income from them to rise or fall. Funds that invest in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than in larger companies funds
Performance Figures
Performance figures are presented on a “gross basis" not reflecting the deduction of investment advisory fees
Index Benchmark Comparison
Performance is compared to the S&P EPAC SmallCap to 12/31/2015, then MSCI EAFE Small Cap (NDR), widely accepted benchmarks for International equity accounts. The indices are unmanaged and do not reflect the deduction of any fees or expenses
Past Performance
The returns presented represent past performance and are not necessarily representative of future returns which may vary. The value of investments can fall as well as rise as a result of market or currency movements
Opinions
Schroders has expressed its own views and opinions in this presentation and these may change
Taped Telephone Lines
For your security, communications with our London office may be taped or monitored
Data Protection
For the purposes of the United Kingdom’s Data Protection Act 1998, the data controller in respect of any personal data you supply is Schroder Investment Management North America Limited. Personal information you supply may be processed for the purposes of investment administration by the Schroders Group which may include the transfer of data outside of the European Economic Area. Schroder Investment Management North America Limited may also use such information for marketing activities unless you notify it otherwise in writing
June 2017
Disclosure statement
40
ContactSchroder Investment Management North America Inc.875 Third Avenue, New York, NY 10022(212) 641-3800
www.schroders.com/us