Monthly Fund Update

Issued in June 2016
For Professional Investors and Advisers Only
Monthly Newsletter
Schroder ISF* Global Conservative Convertible Bond
Covering May 2016
Performance %**
Schroder ISF Global
Conservative
Convertible Bond
May
2016
3
Months
6
Months
1
Year
USD
I class
A class
BM
0.22%
0.10%
0.34%
2.36%
1.99%
2.86%
-1.40%
-2.11%
-1.66%
0.00%
-1.47%
-2.40%
EUR
I class
A class
BM
0.14%
0.01%
0.25%
2.06%
1.69%
2.59%
-1.86%
-2.58%
-2.06%
-0.47%
-1.92%
-2.90%
CHF
I class
A class
BM
0.10%
-0.03%
0.21%
1.98%
1.60%
2.48%
-2.07%
-2.79%
-2.31%
-1.06%
-2.49%
-3.48%
Benchmark: Thomson Reuters Global Focus Investment Grade hedged
Convertible Bond Index (EUR/CHF)
Source: Bloomberg/Schroders as at 31/05/2016.
Market overview
Global stock markets carried their recent positive
momentum into May, seeming at last to truly leave
the bad start to the year behind. US markets
approached last year’s highs and European
markets showed a similarly strong upward trend.
Both Japan and Asia ex Japan, meanwhile, lagged
behind.
Analysts have grown accustomed to scrutinising
central bank activity and the oil price to find
explanations for market sentiment. In May, it
appeared that a summer US rate increase grew
more likely. This fact would have scared markets
only a few months ago, but markets in May were
relatively sanguine. The same holds true for the
further devaluation of the Chinese Yuan. The oil
price has also climbed a full 88% from its low.
Again, while this may have been construed as
inflationary and an obstacle to global growth, it was
greeted as welcome news.
The MSCI World Index ended the month of May
with a gain of 0.7% In the US, the S&P, Dow
Jones, and Nasdaq were all up, gaining 1.8%,
0.5% and 3.8% respectively. European bourses
also closed the month in positive territory.
Germany’s Dax rose by 2.2%, France’s CAC by
3.5%, the UK’s FTSE100 by 0.3% and Spain’s
IBEX by 0.6%. Italy’s MIB was the odd one out with
a loss of -1.0%.
The picture in Asia was a bit more mixed. Japan,
China, and Taiwan showed positive performance
with index advances of 3.4%, 0.6% and 1.9%
respectively while markets in Hong Kong (-0.5%)
and Singapore (-1.0%) were both down.
Credit spreads tightened further - in line with
positive equity markets – and have reached yearto-date lows.
Conservative convertible bonds participated only
slightly from positive stock markets. The Thomson
Reuters Global Focus Investment Grade
convertible index posted a gain of 0.34% (in US
dollar terms). Schroder ISF Global Convertible
Bond slightly underperformed its benchmark.
Portfolio overview
We remained true to our conservative fund set-up
also in May and kept equity exposure slightly
below the benchmark. The absolute exposure
values only moved marginally to 29.6% equity
exposure at the end of May.
We remain defensive on higher-delta names
especially from the IT sector as well as consumer
discretionary. On a regional level we are
overweight Japan.
Once more, the primary market in May was
dominated by European names. Overall, $4.2
billion of new convertible bonds came to the
market bringing the annual figure up to $23.4
billion. Over the same first five months of last year,
we saw twice that volume. This month we
participated in German industrial MTU as well as
Nexity from France.
Implied volatility, as a typical measure of the price
for the conversion right, has remained at a very low
28%. We consider this as a very attractive level to
build up convex equity exposure.
The fund’s running yield stands at 0.7%. The
fund’s bondfloor remains at a high 90% and the
overall credit rating in the fund remains A.
Outlook and strategy
What a difference a few months in global markets
makes. From panic-ridden February lows we have
* Schroder International Selection Fund is referred to as Schroder ISF throughout this document
** Euro hedged, CHF hedged and USD A and I share classes shown bid to bid as at 31 May 2016, Source: Bloomberg. Portfolio data
sourced from Schroders (unaudited). All data as at 31 May 2016 excludes derivative positions.
Issued in June 2016
moved back to near all-time highs at the end of
May. As conservative investors, we have pointed
out in recent newsletters that the speed of the
recovery rally looked unsustainable. However, we
also note that positive investor sentiment remains
more than just euphoric hype. There always seems
some room left for further central bank activity and
quantitative easing.
We continue to believe that convertible bonds are
a compelling vehicle in this type of market. The
exposure to equity markets offers the potential for
further upside, but good protection is also offered
by the bond element to mitigate future volatility. We
maintain our view that negative interest rates shore
up the portfolio channel, but they also move
investors into risky assets that they are unable to
hold when markets turn south. This leads to
heightened volatility and gives even more reason
to build some protection into asset allocation.
There is evidence to suggest that stock rallies can
last longer after risk and sentiment indices - such
as the Credit Suisse Panic index - have hit lows.
The oil price is moving in the right direction,
perhaps a bit too sharply, and is likely to pause for
For Professional Investors and Advisers Only
breath from here. Inflation stayed subdued and
central banks are working in tandem to ensure high
levels of liquidity while keeping exchange rates
more stable. All in all, we see the developments as
good news for investors.
As always though, there are valid reasons to
monitor risk levels. The International Monetary
Fund has trimmed growth expectations once more,
the vote on Brexit is fixed for 23 June, Spanish
elections are scheduled for just three days later,
the Federal Reserve is still expected to raise rates
at the June meeting, and China’s economy
remains between a rock and a hard place.
We somewhat optimistically believe that the glass
is more half-full than half-empty. As always, this
advice is much easier to give to investors in
convertible bonds, with the in-built safety net of a
bond floor. Convertible participation in the equity
market via a long term option, paired with strong
credit selection, continues to provide investors in
convertible bonds a good mix of equity exposure
and safety.
Issued in June 2016
For Professional Investors and Advisers Only
Fund Data
Fund data as at 31 May 2016***
Team
Portfolio managers
Dr. Peter Reinmuth
Stefan Krause
Size & Holdings
Fund size in base
currency (USD)
143.6m
Number of issues
59
Regional Allocation
Portfolio
Index
Europe
64.85%
61.80%
Asia
3.92%
3.43%
Japan
6.63%
4.56%
Americas
14.03%
20.00%
Others
6.75%
10.20%
Cash
3.82%
0.00%
Sector Allocation
Portfolio
Index
Consumer Disc.
15.03%
16.19%
Consumer Staples
2.05%
1.69%
Energy
10.41%
7.99%
Financials
17.68%
18.60%
Health Care
2.61%
3.36%
Industrials
16.66%
16.40%
Information
Technology
6.33%
12.68%
Materials
3.33%
1.78%
Others
0.00%
0.00%
Telecoms
11.66%
10.36%
Utilities
10.43%
10.95%
Cash
3.82%
0.00%
Portfolio Statistics****
Yield
0.65%
Effective Duration
2.56 years
Equity Sensitivity
29.97%
Delta
Bond Floor
Average Rating
Credit Spread
***
0.38
90.69%
A
87bps
Source: Schroders. Please note that the sector and country split follows the underlying equity rather than the issuer.
**** Average credit quality is based on official ratings where available and implied ratings. Yield is estimated on a running yield basis.
Issued in June 2016
For Professional Investors and Advisers Only
Credit Rating
AAA
Equity Sensitivity
0.43%
0.71%
27.04%
5.52%
4.83%
AA
43.33%
39.07%
A
49.71%
2040%
44.45%
49.49%
55.39%
BBB
BB
1.22%
0.00%
B
0.00%
0.00%
CCC and
below
28.15%
0-20%
14.64%
4060%
>60%
0.00%
0.00%
19.88%
7.51%
8.64%
Schroder ISF Global Conservative Convertible Bond
Schroder ISF Global Conservative Convertible Bond
Thomson Reuters Global Focus IG Convertible Bond USD hedged
Thomson Reuters Global Focus IG Convertible Bond USD hedged
Source: Schroders as at 31/05/2016.
Top Ten Issues
Weight
Sector
Koninklijke KPN NV / America Movil 2020
5.46%
Telecommunication Services
Total 2022
4.60%
Energy
Steinhoff 2022
4.39%
Consumer Discretionary
Deutsche Post 2019
4.29%
Industrials
Intel 2035
4.02%
Information Technology
Priceline Group 2021
3.57%
Consumer Discretionary
Telefonica 2021
3.17%
Telecommunication Services
Siemens 2019
3.14%
Industrials
Vodafone 2020
3.02%
Telecommunication Services
Siemens 2017
2.97%
Industrials
Source: Schroders as at 31/05/2016.
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, communications may be taped or monitored. Risk
Considerations The capital is not guaranteed. The capital is not guaranteed. Non-investment grade securities will generally pay higher yields
than more highly rated securities but will be subject to greater market, credit and default risk. A security issuer may not be able to meet its
obligations to make timely payments of interest and principal. This will affect the credit rating of those securities. 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.
Investment in bonds and other debt instruments including related derivatives is subject to interest rate risk. The value of the fund may go down if
interest rate rise and vice versa. It may be difficult to sell quickly positions of one or more companies to meet redemption requests upon demand
in extreme market conditions.

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