Fund Update

For professional investors and advisers only
Schroder ISF* Asian Dividend Maximiser
Fund Update
Covering 2nd Quarter 2016
Market Review
Asian equities were broadly flat in US dollar terms in the second quarter. Chinese equities finished broadly flat over
the period as disappointing trade data in April was followed by mixed data for May – with imports contracting at their
slowest pace since October 2014 but the decline in exports picked up from April’s pace. Over the quarter, the
People’s Bank of China weakened its yuan mid-point by the most in nearly a year, as Brexit-related angst saw
predictions that further depreciation in the currency was likely. The yuan ended the quarter down -2.9%. Australia
was flat as domestic political uncertainty weighed on returns. In Hong Kong, stocks finished the quarter up on
expectations that the Fed would delay raising interest rates. Over the strait in Taiwan, shares rose on gains in
technology stocks which benefitted from higher-than-expected estimates of orders for the new Apple iPhone. Korean
stocks declined on the planned inclusion of Chinese companies in the MSCI index, which saw foreign investors take
profits. In ASEAN, Indonesian, Philippine and Thai stocks all gained as it benefitted from expectations of a delay in
Fed action over interest rates.
Equity portfolio performance
The fund delivered positive US dollar returns and outperformed the benchmark. Positive contribution came from
strong stock selection in our Taiwan while the fund’s key detractor was negative stock selection in Australia.
The fund’s leading country contributor over the period was our positive stock selection in Taiwan, where our holdings
in select technology manufacturing names benefitted given higher-than-expected estimates of orders for the new
Apple iPhone.
Strong stock selection in Hong Kong and Singapore also contributed positively. Our holdings in more defensive
names including telcos and REITs outperformed the broader market as investors sought out yield amid global market
uncertainty.
Meanwhile, the fund’s leading detractor was our negative stock selection in Australia. Our holdings in select
materials names underperformed the market as weak data out of China’s economy and the uncertain Global outlook
weighed on share prices.
Negative stock selection in Thailand also detracted from performance as our holdings in select telecoms operators
underperformed the market on the back of an uncertain regulatory environment.
On the sector front, financials and telecom services were the leading contributors to performance while materials and
information technology were the top detractors.
Performance of option overlay
The option strategy was a benefactor during the second quarter in mark to market terms (incorporating the valuation
of outstanding options), adding 0.20%. Four trades expired during this period, making a net positive contribution of
0.15% in net cash terms. 46 of the 179 option positions taken finished above their strike prices. Some of these
names that performed strongly were Taiwan Mobile, MGM China and Sands China but we mitigated some of the
losses by taking lower premiums on Taiwan Mobile and only overwriting 50% notional on the latter two names,
leaving some of the equity uncapped. In addition, we took larger premiums from names like Brambles, Woolworths
and Yue Yuen which subsequently finished below the strike.
Outlook and fund strategy
Maintain focus
It is tempting to react to major headline news like the Brexit vote but with the political outcome completely uncertain
we feel there is no immediate reaction required. We are monitoring positions and if we see marked relative moves
within our stocks we may use this as an opportunity to undertake some repositioning.
We cannot predict political outcomes or macroeconomic trajectories with any certainty, but we can continue to focus
on individual companies that are able to execute in challenging circumstances.
Uncertainty remains
Although the near term market outlook remains volatile the knock on from the outcome of the UK referendum has
been a downward shift in global interest rate expectations which at the margin should be supportive of both Asia and
income strategies.
Whilst we remain structurally cautious on economic growth, we need to temper our gloom as bottom up there are
good businesses with secular growth in the right sectors. Regional earnings revisions have started to show some
signs of stabilisation including in the more cyclical areas.
Hunt for Asian yield
So how should one invest in a world of ageing demographics, political uncertainty and low interest rates? A high
dividend-yielding strategy is often the preferred strategy-of-choice for the ageing population because elder people
require more current income of which dividend payments are a part. In Asia we place a higher premium on
companies that pay sustainable dividends.
Furthermore, there continue to be positive structural reasons to favour companies paying consistent dividends in
Asia, not the least of which it is one sign of robust corporate governance that a company pays dividends. The current
deflationary environment is supportive for dividends while Asia is one of the highest-yielding regions globally.
Dividend returns in Asia are highly-correlated to economic growth and account for over three-fifths of long-run equity
returns. The region also continues to compare favourably in its share of higher yielding (+4%) stocks when in relation
to its global market capitalisation weighting.
Focus on Asian fundamentals
The long term structural trends of growing consumption across the most populous region in the world remain a
powerful backdrop but investing in the right companies is key and a number of obvious beneficiaries are fully valued.
We maintain a bottom-up investment view and continue to look for good companies where we can see a strong
income case and potential for capital growth.
Options strategy
In terms of the overlay strategy, we carried out four new option trades in the second Quarter. For the first trade, we
sold options on 48 of the 66 names held, 14.7% of NAV and receiving a weighted average strike of 110.18%. For the
second trade, we sold options on only 26 of the 66 names held, and 6% of the NAV. This reflects an increase in the
number of trades to 5 per quarter, thereby splitting the trades further and benefiting from higher averaging: we
received a weighted average strike price of 109.67% in return. For the third trade, we sold options on 42 of the 66
names held, 13.3% of NAV and receiving a weighted average strike of 110.29%. Finally for the fourth trade, we sold
options on 46 of the 66 names held, 13.9% of NAV and receiving a weighted average strike of 110.88%.
Decisions in these trades included increasing the overwritten ratio for HSBC to 75% and keeping the ratios for Belle,
Shimao, Illuka Resources and Sands China below 50%, given the potential spike risk we see. In any case, in the
second trade we chose not to trade Belle, Iluka Resources & Shimao along with NAB, Chunghwa Telecom and
Taiwan mobile as we felt the strike prices we received did not reflect the prevailing volatility levels in the market. We
took lower premiums from names like Link Reit, Mapletree and Comfortdelgro whilst taking larger premiums from
Amcor and Sinopec.
** Figures shown for options contributions are calculated internally, unaudited and gross of fees.
*Schroder International Selection Fund. Risk Considerations: The capital is not guaranteed. The fund intends to make regular yield payments to
investors and, if its total return is not sufficient to cover these payments, these payments may reduce the fund's capital. Investments denominated in
a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The
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fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The derivative strategy is applied
repeatedly over three-monthly periods. This strategy will increase the income paid to investors and reduce the volatility of returns, but there is the
potential the performance or capital value may be eroded. The fund enters into financial derivative transactions. If the counterparty were to default,
the unrealised profit on the transaction and the market exposure may be lost. The fund makes use of financial derivative instruments. It is expected
that the strategy will typically underperform a similar portfolio with no derivative overlay in periods when the underlying stock prices are rising, and
outperform when the underlying stock prices are falling. 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 Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited
semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An
investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results,
prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has
expressed its own views and opinions in this document and these may change. This document is issued by Schroder Investment Management Ltd.,
31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, all telephone calls are
recorded.
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