US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell...

38
Marketing material for professional investors or advisers only. This material is not suitable for retail clients Schroders Investment Conference 2018, Manchester 22 May 2018 Jenny Jones, Head of US Small & Mid Cap Equities US Small & Mid Cap Equities #SICM18 @Schroders_UK

Transcript of US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell...

Page 1: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

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

Schroders Investment Conference 2018, Manchester

22 May 2018

Jenny Jones, Head of US Small & Mid Cap Equities

US Small & Mid Cap Equities

#SICM18

@Schroders_UK

Page 2: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

A quick recap…

Page 3: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Why Schroders US Small Cap?

2

Schroder US Small Cap: attractive risk/return profile since 2003

Access to a risky asset class at a lower level of risk

Source: Schroders, Morningstar, January 2003 to December 2017. Composite (gross of fees), USD. Performance shown is past performance. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. Other periods may have achieved different results. Please refer to the back of this presentation for Important Information.

Key points– Focus on downside protection – Portfolio construction uses three distinct types

of stocks– Mispriced growth offer capital growth

opportunities– Steady Eddies provide capital preservation– Turnarounds offer idiosyncratic growth potential

– Stock selection a strength of the team

Standard deviation

Annualized return (%)

Return(%)

Standard Dev (%)

Schroder US Small Cap 13.5 15.2

Russell 2000 Index 11.2 18.2

S&P 500 Index 9.9 13.3

Schroder US Small

Cap

Russell 2000

S&P 500

6

8

10

12

14

16

10 12 14 16 18 20

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Distinguishing characteristics

3

Diversified sources of alpha

The opinions stated in this document are those of the US Small and SMID Cap Equity team and are subject to change.

Mispriced growth (50–70% of portfolio)Objective: Capital Growth– Companies experiencing a period of growth due to industry or company factors– Price understates: sales growth OR incremental margin growth OR rising cash flow return

on investment– Tend to lead our portfolio in rising markets as investors seek growth opportunities

Steady Eddies (20–50% of portfolio)Objective: Capital Preservation– Companies with stable/recurring growth characteristics – Strong free cash flow, good balance sheet but these are not traditional value stocks– Generally provides the ‘ballast’ for difficult markets as investors seek consistency

Turnarounds (0–20% of portfolio)Objective: Idiosyncratic Growth– Companies whose growth engine has broken– Catalysts in place with evidence that growth is returning– Riskiest category, performance is driven by specific risk

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Schroder US Smaller Companies

Snapshot on positioning

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Diversified alpha sources

5

US Small Cap Strategy historical allocations (weighted)

Source: Schroders, FactSet as of 30 April, 2018.

62%

35%

3%0

10

20

30

40

50

60

70

80

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Mispriced growth Steady Eddies Turnarounds

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Schroder US Smaller Companies Fund

6

Portfolio vs. index

Sector weights – April 30, 2018

Source: FactSet, Style Research as of 30 April, 2018 in GBP. Sector weights for the account and the Benchmark index are for illustrative purposes only and subject to change and should not be viewed as an investment recommendation. *Active share is a measure of the percentage of stock holdings in a portfolio that differ from the benchmark index.

%Active share* = 92.2%

16.4

6.2

15.8

2.0

9.8

3.41.7

12.3

19.3

4.9

13.7

6.4

13.6

4.1

16.8

3.92.2

14.0

18.5

6.7

0

5

10

15

20

Prod

ucer

Dur

able

s

Mat

eria

ls a

nd P

roce

ssin

g

Cons

umer

Dis

cret

iona

ry

Util

ities

Hea

lth C

are

Ener

gy

Cons

umer

Sta

ples

Tech

nolo

gy

Fina

ncia

l Ser

vice

s

REIT

s

Schroder US Smaller Companies Russell 2000

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41% 44% 43% 44%51% 51% 48%

54% 54%

02468101214

0%10%20%30%40%50%60%

12/3

1/20

10

12/3

0/20

11

12/3

1/20

12

12/3

1/20

13

12/3

1/20

14

12/3

1/20

15

12/3

0/20

16

12/2

9/20

17

3/29

/201

8

Other HCBiotech & pharmaBiotech & pharma as a % of health care weight

1.60

1.40

-0.21

-0.37

-0.63

-1.84

-7.03

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3

Medical Services

Medical & Dental Instruments

Medical Equipment

Health Care Management

Health Care Facilities

Health Care Services

Biotech & pharma

Schroders US Small relative to the Russell 2000

Spotlight on health care

7

Schroders US Small Cap

Source: FactSet of March 31, 2018 in USD. Sector weights for the account and the Benchmark index are for illustrative purposes only and subject to change and should not be viewed as an investment recommendation. Portfolio weights are based on a representative account.

Schroders US Small health care positioning Russell 2000 health care sector

Biotech and specialty pharma now constitute 54% of the health care sector and over 9% of the benchmark

Out of the 222 biotech & pharma companies in the Russell 2000, only 22 have positive 12 month trailing earnings (10%)

Despite the strong one year returns at the index level, the one year median return for biotech and pharma is negative.Average return: 15.28%Median return: -4.86%

A big deal Buying the dream Feast or famine

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0

50

100

150

200

250

300

350

400

450

2018 2019 2020 2021 2022 2023 2024 2025 2026$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2011

2012

2013

2014

2015

2016

2017

E

2018

E

2019

E

2020

E

2021

E

2G 3G 4G LTE 5G

Technology: a positioning snapshot

8

Source: Bank of America, Merrill Lynch Global Research estimates. Forecast risk warning: Please see the information slide at the end of this presentation.

Estimated North America IoT volumes ($bn) Mobile infrastructure TAM by wireless technology

– Defensible positions in vertical industries

– IT/Services process outsourcing– Underweight cloud oriented

Software as a Service (SaaS) due to valuations and narrow moats

– Semiconductor companies with greater infiltration to auto and industrials

– Packet optical communications– Server based components for

memory/storage

Software cloud SemiconductorsCommunications and computing infrastructure

$bn $bn

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Entegris, Inc.

9

Chip innovation has moved beyond physical scaling

Long-term secular growth opportunity

Source: Schroders, Company Reports. Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.Forecast risk warning: Please see the information slide at the end of this presentation.

Building blocks for growth

It’s no longer about increasing speed just through smaller transistors….

…it’s about finding ways to build more advanced chips.

Materials innovation is the key driver of this new approach

3 to 5 year CAGR

Materials intensityIncreasing contaminationcontrol SAM expansionShare gains

~2–3%Global GDP

~1–2%

~2–3%

Wafer starts in excess of GDP

5% to 8%expected

annual growth

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Navigating the Amazon

10

All-conquering Amazon elicits fear in corporate boardrooms

Distribution models under threat by Amazon

Source: Statista, Recode, FactSet. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

0

500

1,000

1,500

2,000

2,500

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Number of Amazon mentions on publiclyavailable conference calls

Misunderstood threat = mispriced opportunities

Traditional retail

Dentalsupply

Cloud(AWS)Auto parts

GroceryIndustrial distributors

Feelingthe

impact

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Hudson, Ltd

11

Competitive advantages

A travel retailer

Source: Schroders, company report, ACI-NA Concessions Benchmarking Survey, Airport Revenue News (ARN).For illustrative purposes only and should not be viewed as a recommendation to buy or sell. Forecast risk warning: Please see the information slide at the end of this presentation.

– Average airport dwell time is 66–75 minutes increases spend

Captive audience

– Favorable customer demographics

Higher propensity to spend

– Customer driven by a combination of impulses and immediate needs

Insulated from e-commerce

– Complex operating environment creates a barrier to entry

Regulatory environment

Diversified product categories

37%

15%12%

9%

7%

6%5%

5%4%Diversified salesFood & BeveragePerfume & CosmeticsFashionLiteratureOtherWatches, Jewelry, AccessoriesWine & SpiritsElectronicsTobacco

Historical and projected North American passenger volumes

0

1

2

3

2010 2013 2016 2019 2022 2025

Domestic passengers International passengers

(Billions)

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Schroder US Smaller Companies Fund

12

Performance attribution: 1 year to 30 April 2018

Source: Schroders, FactSet, Gross of fees in GBP. Sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– Stock selection contributes most in energy and financial services– Value added from underweights to REITs– Stock selection detracts most in health care and consumer discretionary– Underweight to technology detracts

Performance attributionUK-RUT Small vs. Russell 20004/30/2017 to 4/30/2018British Pounds

UK-RUT Small Russell 2000 Attribution analysisRussell sectors extended Average

weightTotal

returnContribution

to returnAverage

weightTotal

returnContribution

to returnAllocation

effectSelection +Interaction

Totaleffect

REIT 4.43 -0.92 -0.01 7.50 -8.54 -0.55 0.38 0.36 0.73Financial Services 18.33 5.60 0.98 18.62 3.02 0.55 0.03 0.42 0.45Utilities 2.65 8.25 0.21 4.54 -3.49 -0.15 0.14 0.30 0.45Energy 3.26 14.70 0.40 3.28 -2.07 0.03 -0.11 0.48 0.37Materials & Processing 5.50 -0.18 0.06 6.71 -2.87 -0.21 0.12 0.15 0.27Producer Durables 15.98 4.33 0.66 13.80 3.79 0.53 0.02 0.01 0.02Technology 12.56 9.69 1.03 14.20 8.17 1.23 -0.16 0.15 -0.01ETFs & Futures 0.92 6.09 0.01 -- -- -- -0.02 -- -0.02Consumer Staples 2.22 -6.28 -0.18 2.45 -4.88 0.13 0.05 -0.07 -0.02Cash 7.70 -3.99 -0.31 -- -- – -0.66 -- -0.66Consumer Discretionary 14.90 -1.23 -0.12 13.37 6.61 0.86 0.05 -1.13 -1.09Health Care 11.56 -0.12 0.50 15.52 18.81 2.59 -0.30 -1.73 -2.03Total 100.00 3.23 3.23 100.00 4.76 4.76 -0.47 -1.07 -1.53

++--

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The market

Page 15: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

19.92%

5.72%

90

95

100

105

110

115

120

125

130

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb-

18

Mar

-18

Russell 2500 Growth – Total Return IndexRussell 2500 Value – Total Return Index

18.82

-1.52

-10

-5

0

5

10

15

20

25

30

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb-

18

Mar

-18

High momentumLow momentum

Market trends: momentum and growth lead

14

Russell 2500 Growth vs. Russell 2500 Value

Headwinds for our style

Source: FactSet as of 31 March, 2018.

High momentum stocks vs. low momentum stocks*

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-10.6-7.0-6.4

-4.5-2.2-1.4-1.2

3.87.17.37.57.58.78.99.710.1

11.913.6

15.420.8

-20 -10 0 10 20 30

High dividend growthLow - high fwd P/E

Low - high EV-EBITDAHigh LTM total yield

Low - high capexHigh cash & ST Inv/MC

Large - small market capLTM FCFF Yield

Incremental free cash flowLow - high short interest

High - low earnings qualityHigh foreign sales

Low - high PTBVBeta

Prior year top performersReturn on equity

MomentumHigh net cash - high net debt

EPS growthSales growth

Factor performance

15

Thematic basket (% change)January 2017 to present

Source: Wolfe Research as of 19 April, 2018. Universe is the largest 1,001–2,500 market cap companies.

Since the beginning of last year, “Growth” has been the big winner

Companies less exposed to rising rates have been good performers

Momentum has been strong, given strong leadership consistency

Somewhat surprisingly, “Quality” metrics have also outperformed

Earnings based “Value” metrics have been big laggards

Within the SMID-cap universe, Dividend themes have underperformed

Page 17: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

US economy is solid

16

%

GDP is rising and the outlook is favourable

Source: Schroders, FactSet as of 20 April, 2018. Forecast risk warning: Please see the information slide at the end of this presentation.

3.0%

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Q2

2003

Q4

2003

Q2

2004

Q4

2004

Q2

2005

Q4

2005

Q2

2006

Q4

2006

Q2

2007

Q4

2007

Q2

2008

Q4

2008

Q2

2009

Q4

2009

Q2

2010

Q4

2010

Q2

2011

Q4

2011

Q2

2012

Q4

2012

Q2

2013

Q4

2013

Q2

2014

Q4

2014

Q2

2015

Q4

2015

Q2

2016

Q4

2016

Q2

2017

Q4

2017

Q2

2018

e

Q4

2018

e

Q2

2019

e

Q4

2019

e

US GDP YoY

2018–2019Estimated

Page 18: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Small business – heart of US economy

17

US total employment

Optimism begets optimism

Source: FactSet as of 31 March, 2018.

Small business optimism

Small and Mid businesses:83% of US employment

S&P companies17% of US employment

104.70

80

90

100

110

1986

1988

1990

1993

1995

1997

2000

2002

2004

2007

2009

2011

2014

2016

Recession Periods – United States

NFIB Small Business Economic Trends, Optimism 1986=100, NSA, Index – United States – LHS

Page 19: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

%

Employment remains high

18

Unemployment and underemployment1

Steady job creation leads to falling unemployment

1Schroders, FactSet as of 30 April, 2018.2FactSet as of 30 April, 2018.

New job creation2

Thousands

3.90

7.40

0

2

4

6

8

10

12

14

16

18

20

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Unemployment Rate, U-3 – Percent, Sa – United States

Unemployment Rate, U-6 – Percent, Sa – United States

-800

-600

-400

-200

0

200

400

600

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Employees On Non-Farm Payrolls, Change From Previous Month (Unrevised), Sa, Thous Persons – United States

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Earnings, spending and inflation

19

Wages and spending1

Spending rising, inflation benign (for the moment)

1AHE Source: FactSet as of 31 March, 2018. PCE Source: FactSet as of 31 March, 2018.2CPI-U Source: FactSet as of 31 March, 2018. ECI Source: FactSet as of 31 March, 2018.

Inflation measures2

2.72

4.41

-4

-3

-2

-1

0

1

2

3

4

5

6

Mar

-07

Sep-

07M

ar-0

8Se

p-08

Mar

-09

Sep-

09M

ar-1

0Se

p-10

Mar

-11

Sep-

11M

ar-1

2Se

p-12

Mar

-13

Sep-

13M

ar-1

4Se

p-14

Mar

-15

Sep-

15M

ar-1

6Se

p-16

Mar

-17

Sep-

17M

ar-1

8

USA – Avg Hourly Earnings 12 Month % Change

Personal Consumption Expenditures, Y/Y

2.40

2.70

-2

-1

0

1

2

3

4

5

6

Mar

-07

Sep-

07M

ar-0

8Se

p-08

Mar

-09

Sep-

09M

ar-1

0Se

p-10

Mar

-11

Sep-

11M

ar-1

2Se

p-12

Mar

-13

Sep-

13M

ar-1

4Se

p-14

Mar

-15

Sep-

15M

ar-1

6Se

p-16

Mar

-17

Sep-

17M

ar-1

8

CPI-U, All Items, US City Average, Y/Y, NSA, Percent - United States

Employment Cost Index, Total Compensation All Civilian All WorkersNsa 12 Month % Change

% %

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Interest rates

20

US 10-Year Treasury Yield

Rising with curve flattening

Source: FactSet as of 24 April, 2018.

US 2-10 Year Treasury Yield Spread

3.0%

1.0

1.5

2.0

2.5

3.0

3.5

Jun-

16

Aug-

16

Oct

-16

Dec

-16

Feb-

17

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec

-17

Feb-

18

Apr-

18

US Govt Yield – 10 Yr

% %

0.52%

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Jun-

16

Aug-

16

Oct

-16

Dec

-16

Feb-

17

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec

-17

Feb-

18

Apr-

18

2–10 Year US Govt Yield Spread

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Not a riskless world

21

Index debt levels

Are small cap companies prepared for a rise in rates?

Source: Factset as of 31 March, 2018.

Floating or fixed?

4.86

4.28

2.71

0 2 4 6

Russell 2000

Russell 2500

S&P 500

Debt/EBITDA

50%

18%

50%

82%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Russell 2000 S&P 500

Floating Interest Rates Fixed Interest Rates

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Valuations

22

Russell 2000 absolute valuations

Changing for the better (a bit)

Source: Bank of America Merrill Lynch, Jefferies. Data as of March 31, 2018. *P/E excludes negative earnings.

Russell 2000 vs. Russell 1000 relative valuations

0612182430

048

121620

1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09 1Q12 1Q15 1Q18

US 10 year rate – LH scale PE Forward – RH scale Long-term Avg

Forecast P/E*

0.50.70.91.11.31.5

1Q79 1Q83 1Q87 1Q91 1Q95 1Q99 1Q03 1Q07 1Q11 1Q15

Russell 2000 valuations relative to Russell 1000 Long-term Avg

Forecast P/E*

Small caps expensive

Small caps cheap

Small caps expensive

Small caps cheap

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2018 US Tax Bill

23

Key items affecting companies

Positive impact on earnings

Source: Schroders, FactSet as of 2 April, 2018.

2018 earnings growth estimates before and after the tax bill

The statutory corporate tax rate drops from 35% to 21%, effective January 1, 2018.

US will move to a territorial tax system which means US taxes will be due only on US sourced earnings.

Overseas cash held by US companies will now be coming back to the US.

Immediate 100% expensing of qualified capital investments. Expect an increase in capital expenditures.

Net-interest deduction: companies will be able to deduct net-interest up to 30% of EBITDA through the end of 2021.

All leads to higher earnings estimates for 2018

13.0%

20.9%19.7%

30.9%

0%

5%

10%

15%

20%

25%

30%

35%

Before the tax bill After the tax bill

S&P 500 Russell 2000

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Thank you

Page 26: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

The appendix

Page 27: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Small – clear performance pattern

26

Why diversification of alpha sources is important

Source: Schroders. Monthly observations for the composite, gross of fees, between 31 January, 2003 and 31 March, 2018. Performance shown is past performance. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed.1Pattern based on US domiciled representative account, net of fees 1/31/2003 to 3/31/2018.

Market environment Falling(index <0% in a month)

Strongly rising(index >3% in a month)

Number of months 66 63

Percentage of months outperforming 89% 14%

Pattern1 Down market capture: 74.0 Up market capture: 85.4

We truncate the left (negative) tail

By giving up a portion of the right tail

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Schroder US Smaller Companies Fund

27

Periods ending 30 April 2018 (%)(Periods greater than one year are annualised)

Performance – net of fees

Source: Schroders, bid to bid, net of fees in GBP as at 30 April 2018, based on Z Acc Units, GBP (Z Acc units linked to A Acc prior to 2014). Index lagged, periods greater than 1 year are annualized. Source of ratings: FE Trustnet, The Adviser Centre and Morningstar, as at 30 April 2018. Please see Important Information at the end of this presentation.

Calendar year performance (%)2

YTD 2018 1 year 3 years 5 years 10 years Since incept.

Schroder US Smaller Cos Fund -2.1 2.5 13.3 15.1 12.7 17.3

Russell 2000 TR Lagged GBP -1.8 4.0 13.4 14.7 13.5 12.1

Outperformance -0.3 -1.5 -0.1 +0.4 -0.8 +5.2

Past performance is not a guide to future performance and may not be repeated.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Schroder US Smaller Cos Fund -12.2 24.1 25.4 -4.6 5.7 33.8 16.8 3.6 42.7 4.7

Russell 2000 TR Lagged GBP -12.2 19.6 31.7 -4.4 8.0 38.2 12.5 0.8 46.0 4.8

Outperformance 0.0 +4.5 -6.3 -0.2 -2.3 -4.4 +4.3 +2.8 -3.3 -0.1

Page 29: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Schroder US Smaller Companies Fund

28

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.

– 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.– The counterparty to a derivative or other contractual agreement or synthetic financial product

could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund.

– A derivative may not perform as expected, and may create losses greater than the cost of the derivative.

– The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss.

Page 30: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Diversified alpha sources

29

US Small and Mid Cap Strategy historical allocations (weighted)

Source: Schroders, FactSet, as of 30 April, 2018. Source: Schroders, Historical allocations are shown since December 2005 are based on a representative account.

56%

36%

8%

0

10

20

30

40

50

60

70

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Mispriced Growth Steady Eddie Turnaround

Page 31: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Schroder US Mid Cap Fund

30

Portfolio vs. index

Sector weights – 30 April 2018

Source: FactSet, Style Research as of 30 April, 2018 in GBP. Sector weights for the account and the Benchmark index are for illustrative purposes only and subject to change and should not be viewed as an investment recommendation. *Active share is a measure of the percentage of stock holdings in a portfolio that differ from the benchmark index.

12.6

9.08.0

3.4 2.8 2.3

17.5

14.8

19.5

4.5

12.4 11.8

7.1

4.2 4.7

2.6

15.413.9

18.7

9.1

0

5

10

15

20

25

Technology HealthCare

Materials andprocessing

Utilities Energy Consumerstaples

Producerdurables

Consumerdiscretionary

Financialservices

REITs

Schroder US Mid Cap Russell 2500

%Active share* = 89.7%

Page 32: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Spotlight on health care

31

Schroders US Small & Mid Cap

Source: FactSet of March 31, 2018 in USD. Sector weights for the account and the Benchmark index are for illustrative purposes only and subject to change and should not be viewed as an investment recommendation. Portfolio weights are based on a representative account.

Schroders US Smid health care positioning Russell 2500 health care sector

Biotech and specialty pharma now constitutes almost 50% of the health care sector and over 6% benchmark

Out of the 240 biotech & pharma companies in the Russell 2500, only 27 have positive 12 month trailing earnings (11%)

Despite the strong one year returns at the index level, the one year median return for biotech and pharma is negativeAverage return: 15.29%Median return: -5.29%

A big deal Buying the dream Feast or famine

1.55

1.23

0.41

0.35

-0.35

-1.45

-4.84

-6 -4 -2 0 2

Medical & Dental Instruments

Medical Services

Medical Equipment

Health Care Facilities

Health Care Management

Health Care Services

Biotech and pharma

Schroders US Smid relative to the Russell 2500

34.7% 37.6% 36.7% 41.9%

45.5% 41.0%38.5% 49.2% 47.3%

02468101214

0%

10%

20%

30%

40%

50%

60%

12/3

1/20

10

12/3

1/20

11

12/3

1/20

12

12/3

1/20

13

12/3

1/20

14

12/3

1/20

15

12/3

1/20

16

12/3

1/20

17

3/31

/201

8

Other HCBiotech & pharmaBiotech & pharma as a % of a health care weight

Page 33: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Schroder US Mid Cap Fund

32

Performance attribution: 1 year to 30 April 2018

Source: Schroders, FactSet, Gross of fees in GBP. Sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– Stock selection contributes most in most in financials– Value added from underweights to REITs– Stock selection detracts most in health care and consumer discretionary– Cash allocation detracts

Performance attributionUK-RUT SMID vs. Russell 25004/30/2017 to 4/30/2018British Pounds

UK-RUT SMID Russell 2500 Attribution analysisRussell sectors extended Average

weightTotal

returnContribution

to returnAverage

weightTotal

returnContribution

to returnAllocation

effectSelection +Interaction

Totaleffect

REIT 3.86 -4.61 -0.11 9.67 -8.08 -0.72 0.78 0.13 0.91Financial Services 18.10 10.63 1.79 18.12 9.27 1.61 0.03 0.18 0.21Materials & Processing 6.23 5.14 0.27 7.33 1.62 0.14 -0.01 0.17 0.16Technology 11.63 12.88 1.31 12.16 10.55 1.21 -0.04 0.17 0.14Utilities 3.50 3.49 0.18 4.35 1.41 0.09 0.03 0.09 0.12ETFs & Futures 0.97 -5.66 -0.09 -- -- -- -0.02 -- -0.02Energy 2.63 -13.27 -0.37 4.18 -0.69 0.05 -0.08 -0.33 -0.41Producer Durables 18.19 1.87 0.33 15.63 4.57 0.72 0.04 -0.57 -0.54Cash 7.72 -2.94 -0.24 -- -- -- -0.56 -- -0.56Consumer Staples 2.97 -28.54 -0.91 2.73 -5.49 -0.16 -0.03 -0.74 -0.77Health Care 10.96 -3.41 0.09 11.85 11.03 1.27 -0.03 -1.18 -1.21Consumer Discretionary 13.25 -3.32 -0.54 13.97 5.29 0.72 -0.05 -1.20 -1.24Total 100.00 1.72 1.72 100.00 4.93 4.93 0.05 -3.26 -3.21

++--

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Schroder US Mid Cap Fund

33

Periods ending 30 April 2018 (%)(Periods greater than one year are annualised)

Performance – net of fees

Source: Schroders, bid to bid, net of fees in GBP as at 30 April 2018, based on Z Acc Units, GBP (Z Acc units linked to A Acc prior to 2014). Index lagged, periods greater than 1 year are annualized.Source for ratings: Fund Calibre, Trustnet, Rayner Spencer Mills and Morningstar as at 30 April 2018. Please see Important Information at the end of this presentation.

Calendar year performance (%)

YTD 2018 1 year 3 years 5 years 10 years Since incept.

Schroder US Mid Cap Fund -3.9 1.3 13.1 15.8 13.1 13.0

Russell 2500 TR Lagged GBP -2.4 4.4 12.8 14.5 13.8 12.5

Outperformance -1.5 -3.1 +0.3 +1.3 -0.7 +0.5

Past performance is not a guide to future performance and may not be repeated.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Schroder US Mid Cap Fund -9.9 23.4 21.8 -2.1 4.0 33.6 18.8 6.7 42.0 5.7

Russell 2500 TR Lagged GBP -15.1 25.6 31.4 -2.6 9.7 35.8 14.9 2.0 41.9 6.6

Outperformance +5.2 -2.2 -9.6 +0.5 -5.7 -2.2 +3.9 +4.7 +0.1 -0.9

Page 35: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Schroder US Mid Cap Fund

34

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.

– 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.– The counterparty to a derivative or other contractual agreement or synthetic financial product

could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund.

– A derivative may not perform as expected, and may create losses greater than the cost of the derivative.

– The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss.

Page 36: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

Experienced leadership, experienced team

35

Average investment experience: 23 years

Supported by: 3 traders; 1 product executive; 1 portfolio management assistant, and 2 additional support staff

Source: Schroders, as of 10 January, 2018.

Robert Kaynor, CFAPortfolio Manager24 years of experienceMaterials, Producer Durables, Consumer2013

Jenny JonesPortfolio Manager

38 years of experienceMaterials

2002

Steve Kirson, CFA34 years’ experienceTechnology, Telecom2005

Joanna Wald17 years’ experienceConsumer, Producer Durables2013

Grant Toch17 years’ experienceFinancials2015

Cezary Nadecki, CFA20 years’ experienceEnergy, Utilities, Producer Durables2004

Peter Wen23 years’ experienceHealth Care2010

David Speyer, CFA13 years’ experienceDurables/REITs/Media2009

Fred Schaefer31 years’ experience

Product Mgr.2007

Sarah Bratton11 years’ experienceProduct Mgr.2011

Page 37: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

DisclaimerFor 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.

Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided is not intended to constitute investment advice, an investment recommendation or investment research and does not take into account specific circumstances of any recipient. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. 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 document when taking individual investment and/or strategic decisions.

The forecasts included in this document 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.

Source for ratings: Fund Calibre, Trustnet, Rayner Spencer Mills and Morningstar as at 30 April 2018. © 2018 Morningstar. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. For more detailed information about Morningstar's Analyst Rating, including its methodology, please go to: http://corporate.morningstar.com/us/documents/MethodologyDocuments/AnalystRatingforFundsMethodology.pdf

Issued in May 2018 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK12853

36

Page 38: US Small & Mid Cap Equities - Schroders...UK-RUT Small Russell 2000 Attribution analysis Russell sectors extended Average weight Total return Contribution to return Average weight

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.

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