Katie Stafford, Client Portfolio ManagerQuantitative Equity Products, Schroders

Global Equities

Market review 2017 YTD

Value – is it different this time?

Risks

Current opportunities

Agenda

Market reviewStyle and regional returns since 2010

Source: Schroders, FactSet in USD as at 31 October 2017. MSCI indices are Net Dividend Re-invested.

50

150

250

350

Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16

Nasdaq 100

US Momentum

US Growth

US Index

World GrowthWorld IndexWorld Value

World ex USEmerging Markets

Style – relative returns1 Value and growth – relative returns (2017 YTD)1

Market reviewWorld index returns – 2017 YTD (October) and 2016

Source: Schroders, FactSet in USD as at 31 October 2017. 1Returns are relative to MSCI World Index. MSCI indices are shown Net Dividend Re-invested (NDR).

-4.0%

-8.4%

5.3%

-3.2% -3.5%-1.3%

10.1%

-12.8%

5.5%

7.2%5.2%

10.7%

-0.3%

6.6%3.5%

31.5%

1.9%

2.4%

-15%

0%

15%

30%

AC W

orld

USA

Euro

pe e

x U

K

UK

Japa

n

Paci

fic e

x JP

EM A

sia

EM E

MEA

EM L

atAm

Value Growth

11.1%

5.4%

3.0%

-3.7% -4.3%-5.1%

-3.3%-4.7%

-3.0%

1.8%0.0%

4.8%

-10%

-5%

0%

5%

10%

15%

Mom

entu

m

Gro

wth

Qua

lity

Hig

h D

iv. Y

ield

Min

Vol

Valu

e

YTD October 2016

Contribution to S&P 500 Index return – 2017 YTD

Market breadthThe bull market has been narrow this year

Source: Schroders, FactSet, in USD as at 31 October 2017. Past performance is not a guide to future performance. Forecasts are not a reliable indicator of future performance. Investors should remember that the value of investments can fall as well as rise.

Total contribution from the best 10 performers= 38% of index return

Total contribution from the best 50 performers= 75% of index return

Total contribution from the other 450+ stocks

+16.3%

0%

5%

10%

15%

20%

Appl

e

Mic

roso

ft

Face

book

Alph

abet

Amaz

on.c

om

John

son

&Jo

hnso

n

Visa

Boei

ng

Nvi

dia

Bank

of

Amer

ica

Nex

t 10

Stoc

ks

Nex

t 30

Stoc

ks

S&P

500

retu

rn

Long-term performance (2004 – September 2017) 2017 YTD (September)

Fundamental driversValue and quality matter over the long run

Source: Schroders QEP. 2004 – Sep 2017. Each month all stocks in the Global Mega to Mid-Cap universe, excluding Financials and Resources, are ranked using QEP’s Global Value Rank and Global Quality Rank. High Quality companies are those stocks in the top 20% of the Quality Rank, Moderate Quality are stocks with a Quality Rank between 20% and 40%, while those companies with a Quality Rank below 40% are classified as Low Quality. Cheap is defined as those stocks in the top 35% of the Value Rank, Market-Like Value are stocks with a Value Rank between 35% and 60%, while those companies with a Value Rank below 60% are classified as Expensive. Market Capitalization-weighted portfolios are rebalanced monthly and USD returns are calculated with transaction costs taken into account. Annualized excess returns are then calculated against a Market Capitalization-weighted universe.

Cheap Mkt. Like Expensive

Hig

h Q

ualit

y

3.6% 0.1% -2.0%

Mod

erat

e Q

ualit

y

4.0% 0.1% -3.9%

Low

Q

ualit

y

0.2% -3.4% -7.3%

Cheap Mkt. Like Expensive

Hig

h Q

ualit

y

-4.6% 1.8% 5.2%

Mod

erat

e Q

ualit

y

-5.3% -2.1% 1.5%

Low

Q

ualit

y

-0.1% -0.4% -3.2%

MSCI World Value vs. MSCI Growth and MSCI World Index (1976 to September 2017)

0%

100%

200%

300%

400%

500%

600%

700%

1976

1977

1978

1980

1981

1982

1984

1985

1986

1988

1989

1990

1992

1993

1994

1996

1997

1998

2000

2001

2002

2004

2005

2006

2008

2009

2010

2012

2013

2014

2016

2017

Value vs. Growth (Cumulative) Value vs. MSCI World (Cumulative)

Performance of value and growthLast 10 years – longest period of underperformance since 1930’s

Sources: Schroders, Datastream, MSCI. MSCI World Value and Growth price index in local currency from 31 December 1975 to 30 September 2017.

Value underperformed

MSCI World by 26%(2007 to 2017 Sept)

Value underperformed growth by 56%

(2007 to 2017 Sept)

MSCI World Value rolling 10 year performance relative to growth (1975–2017)

Performance of value and growthLong-term value performance vs. growth

Source: Schroders, Datastream, MSCI. MSCI World Value performance relative to MSCI World Growth (net dividend reinvested in local currency) from January 1975 to September 2017.

4

18 15

49

21

32

12

26

58

85

61

23

139

20

10

20

30

40

50

60

70

80

90

-30%

--25%

-25%

--20%

-20%

--15%

-15%

--10%

-10%

--5%

-5%

-0%

0%-5

%

5%-1

0%

10%

-15%

15%

-20%

20%

-25%

25%

-30%

30%

-35%

35%

-40%

40%

-45%

>45%

September 2017

10 year rolling performance (%)

Worst 10 rolling periods (1-year and 3-year) of value relative performance and subsequent performance

Value drawdownUnderperformance has historically recovered, often powerfully

Source: Schroders. Relative performance of MSCI World Value vs MSCI World from January 1975 to August 2017 in local currency with net dividend reinvested. Performance shown is past performance and is not necessarily a guide to future performance.

Prior 1 year relative return

Subsequent 1 year relative return

Prior 3 year relative return

Subsequent 3 year relative return

Apr 2000 -10.6% 17.7% Feb 2000 -17.1% 19.7%

Jun 2008 -8.5% 2.2% Jan 1999 -8.4% 11.5%

Jan 1999 -7.7% -4.6% Dec 2009 -7.0% -2.5%

Apr 1987 -5.7% 10.2% Nov 2011 -6.1% -0.6%

Jul 2015 -5.2% -0.3% Apr 1987 -6.0% 13.4%

Sep 2002 -3.9% 2.7% Aug 2012 -6.0% -3.1%

Nov 1980 -3.5% 7.9% Jun 2008 -5.8% 0.6%

Dec 1991 -3.5% 1.7% Jan 2016 -5.7% n/a

Nov 2010 -3.5% -0.6% Nov 1980 -3.5% 9.8%

Apr 2012 -3.0% 2.5% Dec 1991 -3.3% 9.3%

Mean -5.5% 3.9% Mean -6.9% 6.5%

Median -4.5% 2.3% Median -6.0% 9.3%

2017 to September -3.6% ?? 3 years to September -4.3% ??

Implied growth and historic growth by Value cohort

Growth Expectations and ValueExtreme extrapolations priced in for expensive stocks

Source: Schroders. We form 5 quintiles from our global value rank – we restrict this to mid, large and mega caps and exclude Financials. We compute the average historical and implied growth for each of these quintiles. Historical growth is the average 5 year annual growth rates We extract the Implied Growth from the Residual Income Valuation Model using an optimization – this is the growth rate which if applied to earnings forecasts results in the current valuation.

5.5%6.5%

7.4%9.3%

10.7%

1.5%

6.8%

10.3%

14.6%

22.9%

0%

5%

10%

15%

20%

25%

Top Quintile - Cheap Second Quintile Third Quintile Fourth Quintile Bottom Quintile - Expensive

Average Historical % Growth Market Implied Growth

Implied growth is much lower than historic

growth for Value stocks

Expensive stocks must grow faster than they have done historically to justify current

valuations

Top 10 commonly held stocks by global equity investors and smart beta indices

Crowding concernsThe most popular stocks

Source: Schroders, FactSet, MSCI, UBS Quantitative Research. MSCI Index data as at 13 November 2017 (incorporating the November index review announcement). Hedge fund, mutual fund and growth manager data as at 29 September 2017. Hedge fund holdings based on GS Hedge Fund Very Important Long and Mutual Fund Overweights & Underweights indices. 1Based on the median holding weight of Growth managers, including American Century Global Growth, Baillie Gifford Long Term Global Growth, GMO Global Quality, Harding Loevner Global Equity, MFS Global Growth, T Rowe Price Global Growth, Vontobel Global Equity, Walter Scott Global Strategy, latest holding data from MorningStar. Past performance is not a guide to future performance. Forecasts are not a reliable indicator of future performance. Investors should remember that the value of investments can fall as well as rise.

Stock Country Industry MSCI AC World

MSCI ACWI Quality

MSCI ACWI Growth

MSCI ACWI Momentum

Hedge Fund

Mutual Fund

Growth Managers*

MSCI ACWI Value

Apple US Hardware 2.1% 5.3% 4.0% 5.0% 1.9% 1.9% 3.3%

Alphabet US Software 1.4% 4.7% 2.8% 2.1% 2.0% 3.8%

Microsoft US Software 1.4% 5.1% 2.8% 3.8% 2.0% 2.0% 1.7%

Amazon US Online Retail 1.0% 2.0% 2.6% 2.0% 3.2%

Facebook US Social Media 1.0% 1.9% 2.0% 2.0% 2.5%

Tencent China Social Media 0.6% 2.3% 1.2% 1.9% 1.9%

Samsung Korea Hardware 0.6% 0.7% 2.9% 0.7% 0.4%

Alibaba China Online Retail 0.5% 0.9% 2.0% 2.3%

Visa US Payments 0.5% 1.6% 0.9% 2.0% 2.0% 1.6%

Mastercard US Payments 0.3% 1.5% 0.6% 2.1% 1.3%

Total 9.3% 20.5% 17.8% 16.2% 14.0% 11.9% 22.3% 0.4%

– Country risk monitor works as medium term overlay rather than as a short term return model

– Country risk monitor inputs:

– Currency Valuation

– Currency Credibility

– Credit Risk

– Growth Prospects

– Political/ESG

– Reduce risk to bottom-up overweight markets, implemented through currency hedging

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

TaiwanKorea

Czech RepublicMalaysia

PolandThailandHungary

PhilippinesChile

MexicoIndonesia

ChinaGreece

PeruColombia

U.A.ETurkey

South AfricaQatar

RussiaIndiaBrazilEgypt

Pakistan

Currency Valuation Currency Credibility

Credit Risk Growth Prospects

Emerging marketsQEP country risk monitor

Source: Schroders, as at 31 October 2017. QEP Investment team proprietary indicators.

Lower risk Higher risk

ESG integration and risk managementQEP approach

Source: Schroders.

ESG research

QEP ESG rating

Empirical analysis of ESG data

ESG opportunities e.g. Cyber Security

15+Positive

outcomes

50+Ongoing

dialogues

115+Company

engagements

Climate change Engagement (since 2015)

QEP governance

Shareholder friendliness

Businessculture

Risks to minority

shareholders

accounting warning

flags

CO2 Stranded assets

Carbon strategy

Carbon emissions

QEP country risk monitor

ESG risks e.g. Predatory Lending

QEP ESG ratingMSCI ESG

dataAccounting

data

Industry data Text analysis

Business involvement

Controversies

Stock valuation vs. expected Profitability

Quality Adjusted ValueIdentify areas of affordable Quality

Source: Schroders. Data as of 27 September 2017. We plot the Enterprise Value to Capital Employed vs. Forward Return on Capital Employed. Value-Quality trade-off for mega-large stocks ex Financials, Real Estate and Resources sectors. Established Tech are typically hardware producers with inexpensive Quality e.g. Cisco, Intel. FANG stocks are (shown from left to right in chart) Facebook, Alphabet, Amazon, Netflix.

Profitability

Universe Established Tech Healthcare FANG Stocks Telecom Fitted Valuation Line

Expensive

CheapHigher Lower

Value– Our overriding view: value will always return as long as fear and greed exist– Broader macro backdrop becoming more conducive to value investors, but probably also need a de-rating of

growth stocks – Valuation of growth stocks increasingly stretched. Few companies have ever managed to sustain the growth rates

that current valuations imply

Key risks– Crowding in short-term, particularly if liquidity dries up, ESG impact a long-term trend

Current opportunities– Narrow focus on fastest growing companies has increasingly left reliable but slower growing companies on

attractive valuations. We find an abundant number of opportunities, particularly in established technology companies, financials, telecoms and healthcare

Summary

Positioning DisclosureSectors, industries, regions, countries or securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Weights will vary among accounts within the strategy, are subject to change and should not be viewed as an investment recommendation.

Ex-ante Tracking Error is sourced from PRISM (Style Research).

Attribution DisclosurePerformance attribution is based on FactSet data and should be taken as indicative only. It will not match actual published performance due to several features of FactSet methodology.

These include: timing differences on pricing of constituents; not accounting for transaction costs or management fees; assuming trades go through at closing prices rather than actual price dealt; using un-audited accounting data. Sectors, industries, regions, countries or securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

Model DisclosureRanks are constructed by ranking stocks within the relevant universe comprise a selection of Value terms (such as Earnings to Price, Book to Price, Sales to Price, etc.), and Quality terms (Profitability e.g. Return on Equity, Stability e.g. Sales Stability and Financial Strength Debt to Market Cap). The final construction of the rank is done using QEP proprietary weighting scheme

Where model results have been included, 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 model. No allowance was made in the model portfolio for advisory fees.

The actual performance of managed accounts can also impacted by non-quantitative factors such as additional stock selection and risk management activities of the fund management team. These factors cannot be modeled predictably and were not used in preparing the underlying quantitative model or the simulated results. The model portfolio results are hypothetical results. They do not represent an attempt to show actual performance. They are used only to illustrate the impact of a quantitative model. They cannot be used to reflect actual or expected managed portfolio returns.

Important information

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