Schroder US Small & Smid Cap Product Review Representing Schroders: Jenny B. Jones, Head of U.S. Small and Mid Cap Equities Frederick Schaefer, Product Manager May 8, 2013 | For professional investors only. This material is not suitable for retail clients
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Schroder US Small & Smid Cap Product Review
Representing Schroders:
Jenny B. Jones, Head of U.S. Small and Mid Cap Equities
Frederick Schaefer, Product Manager
May 8, 2013
| For professional investors only. This material is not suitable for retail clients
Supported by: 3 traders; 1 product executive; 1 portfolio management assistant, and 1 additional support staff
Jenny Jones Portfolio Manager
33 years of experience Insurance, Capital Goods
Robert Starbuck Research Director 35 years of experience Energy, Materials
John Helfst 18 yrs experience Banks, Brokers,
Specialty Finance
Steve Kirson, CFA 29 yrs experience
Technology
Cezary Nadecki, CFA 14 yrs experience Utilities, Telecom
Fred Schaefer 25 yrs experience
Product Mgr.
Peter Wen 18 yrs experience
Health Care
Average analyst experience: 21 years
Team
1
Robert Kaynor 19 yrs experience
Consumer
Joanna Wald 12 yrs experience
Consumer
Photo Not Available
Source: Schroders, as at 6 May 2013
David Speyer, CFA 8 yrs experience
Consumer
People – portfolio manager supported by an experienced team
Schroder US Small & Smid Cap Equity
2
Leading our Consumer work; January joiner
Robert Kaynor, CFA Type of Experience
2013 Schroders, Equity Analyst Long-only US equity
2010 Ballast Capital Group, Chief Investment Officer,
Managing Member
Long/short US equity
2003 Ramius Capital Group, Managing Director/Portfolio
Manager, Analyst
Long/short equity; portion of
multi-strategy fund
2000 Barbary Coast Capital Management, Partner/Analyst Long/short US equity
1994 RCM Capital Management, Analyst/Assistant Portfolio
Manager
Long-only US equity
Education: Southern Methodist University, BS
Has held a series of progressively more senior investment roles
Experience with both long-only and long/short investing
19 years of fundamental research and investment experience
Joined US Schroders US Small and Mid Cap in January 2013
Schroder ISF US Small & Mid Cap Equity Portfolio Positioning and Performance Attribution
Performance Pattern
We tend to outperform in flat to modestly rising markets and negative markets
We are less likely to outperform in strongly rising markets, given our emphasis on quality and our tendency to
avoid momentum oriented stocks.
Smid – Clear performance pattern Why diversification of alpha sources is important
Source: Schroders; Monthly observations for the composite, gross of fees, between 31 December 2004 and 31 March 2013.
Market environment: Number of months
Number of months Schroders
outperformed
Percentage of months
outperforming
Strongly rising (index >3% in a month) 35 5 14%
Moderately rising (index between 0 and 3%) 27 14 52%
Falling (Less than 0%) 37 30 80%
4
0
10
20
30
40
50
60
70
Dec-
05
Mar-
06
Jun
-06
Sep-0
6
Dec-
06
Mar-
07
Jun
-07
Sep-0
7
Dec-
07
Mar-
08
Jun
-08
Sep-0
8
Dec-
08
Mar-
09
Jun
-09
Sep-0
9
Dec-
09
Mar-
10
Jun
-10
Sep-1
0
Dec-
10
Mar-
11
Jun
-11
Sep-1
1
Dec-
11
Mar-
12
Jun
-12
Sep-1
2
Dec-
12
Mar-
13
Mispriced Growth Steady Eddie Turnaround
Schroder ISF US Small & Mid Cap Equity Diversified alpha sources – historical allocations (weighted)
36%
58%
6%
Source: Schroders, FactSet as at 30 April 2013.
5
Portfolio vs. index
Schroder US ISF Small & Mid Cap Equity Sector weights – April 30, 2013
6
Source: FactSet as of April 30, 2013. Sector weights for the account and the Benchmark Index are subject to change and should not be viewed as an investment recommendation.
13.311.9
14.8
16.6
10.8
14.2
15.9
25.7
1.5
3.2
9.7
5.3
17.6
10.4
3.0
6.37.7
5.9
0
5
10
15
20
25
30
Te
chn
olo
gy
He
alth
Ca
re
Ma
teri
als
&
Pro
cess
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Util
itie
s
En
erg
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Co
nsu
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Sta
ple
s
Pro
du
cer
Du
rab
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Co
nsu
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Dis
cre
tion
ary
Fin
an
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Se
rvic
es
Schroder US SMID Cap Russell 2500
% REITs are 9.2% of the
index
Performance Attribution LUX-SISF SMID vs. Russell 2500
12/31/2012 to 3/28/2013
U.S. Dollar
LUX-SISF SMID Russell 2500 Attribution Analysis
Average Total Contribution Average Total Contribution Allocation Selection + Total
Russell Sectors Extended Weight Return To Return Weight Return To Return Effect Interaction Effect
Health Care 11.89 19.68 2.24 10.18 15.51 1.56 0.03 0.43 0.47
Energy 6.38 14.92 0.95 6.20 11.41 0.71 0.02 0.20 0.22
Source: Schroders. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investments can go down as well as up and is not guaranteed. Please see the important composite disclosures at end of presentation.
Schroder ISF US Small Cap Equity Portfolio Positioning and Performance Attribution
Performance pattern
We tend to outperform in flat to modestly rising markets and negative markets
We are less likely to outperform in strongly rising markets, given our emphasis on quality and our tendency to
avoid momentum oriented stocks.
Small – Clear performance pattern Why diversification of alpha sources is important
Source: Schroders; Monthly observations for the composite between 31 January 2003 and 31 March 2013.
Market environment: Number of months
Number of months Schroders
outperformed
Percentage of months
outperforming
Strongly rising (index >3% in a month) 47 8 17%
Moderately rising (index between 0 and 3%) 31 17 55%
Falling (less than 0%) 45 40 89%
13
Schroder ISF US Smaller Companies Fund Diversified alpha sources – historical allocations
Source: Schroders, FactSet as at 30 April 2013
64%
30%
6%
14
0
10
20
30
40
50
60
70
80
Ja
n-0
9
Apr-0
9
Ju
l-09
Oct-0
9
Ja
n-1
0
Apr-1
0
Ju
l-10
Oct-1
0
Ja
n-1
1
Apr-1
1
Ju
l-11
Oct-1
1
Ja
n-1
2
Apr-1
2
Ju
l-12
Oct-1
2
Ja
n-1
3
Apr-1
3
Mispriced Growth Steady Eddies Turnarounds
Portfolio vs. index
Schroder ISF US Smaller Companies Sector weights – April 30, 2013
15
Source: FactSet as of April 30, 2013. Sector weights are based on a Schroder ISF US Smaller Companies Fund
Sector weights for the account and the Benchmark Index are subject to change and should not be viewed as an investment recommendation.
10.8 11.3
18.5
15.4
13.1 13.4
15.3
25.0
3.54.9
8.7
4.4
16.4
12.8
3.24.3
7.25.8
0
5
10
15
20
25
30
Te
chn
olo
gy
He
alth
Ca
re
Ma
teri
als
&
Pro
cess
ing
Util
itie
s
En
erg
y
Co
nsu
me
r
Sta
ple
s
Pro
du
cer
Du
rab
les
Co
nsu
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r
Dis
cre
tion
ary
Fin
an
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l
Se
rvic
es
Schroder ISF US Smaller Companies Russell 2000
% REITs are 8.8% of the
index
Performance Attribution LUX-SISF Small vs. Russell 2000
12/31/2012 to 3/28/2013
U.S. Dollar
LUX-SISF Small Russell 2000 Attribution Analysis
Average Total Contribution Average Total Contribution Allocation Selection + Total
Russell Sectors Extended Weight Return To Return Weight Return To Return Effect Interaction Effect
1999 Liberty Mutual Insurance Company, Financial Analyst
1998 Ernst & Young LLP, Actuarial Analyst
University of Pennsylvania, MBA
Boston University, BA
12 years of investment experience
<1 year with Schroders
Photo Not
Available
Team biographies Product Management
Frederick Schaefer – Client Portfolio Manager
2007 Schroders, Client Portfolio Manager
1987 Evaluation Associates, Senior Consultant and Principal
1979 Greenwich Associates, Research Manager
BA, University of Notre Dame
26 years of investment experience
6 years with Schroders
Sarah Bratton – Product Executive
2011 Schroders, Product Executive
2010 JP Morgan Asset Management , Senior Analyst Investment Performance
2007 JP Morgan Chase, Associate – Client Service
BA, BS, St. Francis College
6 years of investment experience
2 year with Schroders
42
Philosophically, we believe in:
Schroder US Small & Mid Cap Equity Philosophy
43
Bottom-up, fundamental research – creates an
information edge
Flexibility across sources of alpha -
creates an attractive
risk/return profile
Entry price/valuation
matters – overpaying
detracts from return potential
Understanding your risks –
what you don’t know can hurt
you
Understand the business model
Is it sustainable?
What is the size of the addressable market?
Barriers to entry? Competitive advantages?
Scrutinise the financials
Special attention paid to cash flows and balance sheets
Analyse valuations; calculate target price
Must use two separate methodologies to derive target price
Business model
Financials Valuations
Ideas
Approach
44
Information sources:
Meetings with management
What are their plans?
Good steward of capital?
What does it take to succeed in the industry?
Financial statements
Cash flow and balance sheet analysis important
Discussion with competitors, customers
Talk to sell side analysts:
Understand the industry
Find the negative case
Schroder US Small & Smid Cap Equity Building the mosaic
45
Leveragability of Business
Model
Barriers to Entry
Sales/Earnings Growth Patterns
Management Quality
Competitive Advantage
Cash Flow
Dynamics
Goal: Understand company
and the business model
Initial
research
Portfolio
holding
In-depth
research
Ongoing
inquiry
Schroder US Small & Smid Cap Equity Research-driven process
Idea generation Deep fundamental research Final stock selection
Sources of new ideas:
― Analyst generates new idea
― Brief write-up with supporting materials
― Reviewed by Fund Manager or Research
Director
― Key question: does this stock have a
reasonable chance of getting into the portfolio?
― If yes, proceed with full analysis
Thorough fundamental analysis of:
― Business model
― Cash flows and financials
― Management track record
― Competitors
― Other relevant factors
― Valuation and Target price
Portfolio manager decides:
— Buy, don’t buy or defer
— Position sizing
Source: Schroders,*Represents general market cap but is subject to change
46
Viable Candidate?
No
Yes
Buy?
No
Ideas Bin
Discard
Yes
Distinguishing characteristics
Mispriced growth (50-60% of portfolio)
Companies experiencing a period of growth due to industry or company factors
Resulting in solid growth in top and bottom lines
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)
Companies with stable growth characteristics
Low variability in revenue/earnings; consistency in meeting earnings expectations
Strong free cash flow, good balance sheet
Provide the ‘ballast’ for difficult markets as investors seek consistency
Turnarounds (0-20% of portfolio)
Companies whose growth engine has broken. This can be due to an accounting, management or product issue
Catalysts in place with evidence that growth is returning
Riskiest category, outperformance is driven by specific risk
Diversified sources of alpha
47
Single period correlations: January 2006 – March 2013
Competitive advantage
Mispriced growth Steady eddie Turnaround
Mispriced growth 1.00
Steady eddie -0.12 1.00
Turnaround -0.04 -0.39 1.00
Source: FactSet, Schroders
Correlations are based on historical performance. Past performance is not necessarily a guide to future performance. The value of investments can go down as well as up and is not
guaranteed. Based on the US Smid Composite
Proof statement: our alpha sources deliver returns at different times
48
Performance pattern: truncating the return distribution Diversification of alpha sources creates a lower risk portfolio
49
We truncate the left (negative) tail
By giving up a portion of the right tail
This trade-off is valuable - consider the nature of compounding:
In an extreme case if your portfolio declines 50% you need a 100% return to be made whole
Managing the downside is important for the long-run compounding of wealth
Schroder ISF US Small & Mid Cap Equity Top ten holdings– 30 April 2013
Source: FactSet. Securities mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Please note that portfolio holdings can change at any time. Holdings may vary between accounts with in the same strategy.
Company Description % of Fund
Ross Stores Inc. Off-price retail apparel and home fashion stores 2.0
Gardner Denver Inc. Designs, manufactures, and markets engineered industrial machinery and related parts 1.7
Apartment Investment &
Management Co. A REIT concentrated on multi-family housing 1.7
Sealed Air Corp. Engaged in food safety and security, facility hygiene and product protection business 1.7
CareFusion Corp. Global medical technology company 1.6
Denbury Resources Inc. An independent oil and natural gas company 1.6
Vantiv Inc Provider of electronic payment processing services 1.6
Brinker International Inc. Owns, develops, operates, and franchises the Chili’s Grill & bar and Maggiano’s restaurant
brands 1.6
PartnerRe Ltd. International reinsurance holding company 1.6
Crown Holdings, Inc. Manufacturer of packaging products for consumer goods 1.5
Total 16.6
50
Schroder ISF US Small Cap Equity Top ten holdings– 30 April 2013
Source: FactSet. Securities mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Please note that portfolio holdings can change at any time. Holdings may vary between accounts with in the same strategy.
Company Description % of Fund
NorthWestern Corp. Electricity and natural gas distributor 1.9
Finish Line Inc. Cl A Retailer of athletic shoes, apparel and accessories 1.5
Brinker International Inc. Owns, develops, operates, and franchises the Chili’s Grill & bar and Maggiano’s restaurant
brands 1.5
PTC Inc. Develops and sells product lifecycle management software 1.4
PAREXEL International Corp. Biopharmaceutical services company 1.4
Alterra Capital Holdings Ltd. Insurance holding company 1.4
Applied Industrial
Technologies Inc. North American industrial distributor 1.3
Brown & Brown Inc. Diversified insurance agency 1.3
Cleco Corp. Public utility holding company 1.2
EnerSys Inc. Manufacturer, marketer, and distributor of industrial batteries 1.2
Total 14.1
51
Schroder ISF US Small & Mid Cap Equity Characteristics
Source: Schroders, Bank of New York Mellon as of March 31, 2013..
*Based on composite data.
Portfolio holdings characteristics, except where otherwise indicated, are based on Representative account or the Benchmark Index, and are shown as of March 31, 2013. Tracking error,
Information ratio and Sharpe ratio are based on the composite. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of
investments can go down as well as up and is not guaranteed. Please see the important composite disclosures at end of presentation.
Schroders US SMID Cap Equity Russell 2500
Market cap – Weighted median ($bn) 5.1 3.4
Market cap range $819 million – 17.6 billion $24 million – 11.1 billion
P/E (excluding neg. earnings) 16.8x 18.7x
P/B 2.3x 2.1x
Dividend Yield 1.1% 1.4%
1 Year Forecast Growth (I/B/E/S Medians) 9.6% 10.9%
% in top 10 stocks 16.5% 3.0%
Beta* 0.81 1.00
Tracking error (actual, 5yrs)* 5.72 --
Information ratio (5yrs)* -0.13 --
Sharpe ratio (5yrs)* 0.41 --
52
Schroder ISF US Smaller Companies Characteristics
Source: Schroders, Bank of New York Mellon as of March 31, 2013.
*Based on composite data.
Portfolio holdings characteristics, except where otherwise indicated, are based on Representative account or the Benchmark Index, and are shown as of March 31, 2013. Tracking error,
Information ratio and Sharpe ratio are based on the composite. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of
investments can go down as well as up and is not guaranteed. Please see the important composite disclosures at end of presentation.
Schroders US Small Cap Equity Russell 2000
Market cap – Weighted median ($bn) 2.3 1.5
Market cap range $196 million – 17.6 billion $24 million – 5.6 billion
P/E (excluding neg. earnings) 19.7x 19.2x
P/B 2.3x 2.0x
Dividend Yield 1.1% 1.4%
1 Year Forecast Growth (I/B/E/S Medians) 16.7% 16.4%
% in top 10 stocks 14.0% 2.6%
Beta* 0.84 1.00
Tracking error (actual, 5yrs)* 5.4% --
Information ratio (5yrs)* 0.01 --
Sharpe ratio (5yrs)* 0.38 --
53
Important information
Risk Warnings:
Investments in equities are subject to market risk and, potentially, to currency exchange rate risk. This fund may use financial derivative instruments as a part
of the investment process. This may increase the fund’s price volatility by amplifying market events
Important Information:
This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the
“Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares
Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and
subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management
(Luxembourg) S.A.
An investment in the Company entails risks, which are fully described in the prospectus
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the
amount originally invested
Schroders has expressed its own views and opinions in this document and these may change