Fund Update

For professional investors and advisers only
Schroder ISF* Global Equity Yield
Fund Update
Covering December 2016
Overview
Global equity markets delivered positive returns in December. The fund outperformed, returning 3.0% 1 compared to the MSCI
World index return of 2.4%.
The market and the drivers of fund performance
The fund posted a positive return, outperforming the index. Some of our holdings in the energy sector performed well with oil prices
rising after an agreement by both OPEC and non-OPEC countries to cut oil production. Italian oil major Eni and US oil refiner
HollyFrontier were both among the leading individual contributors to fund returns.
Elsewhere, UK utility firm Centrica was another gainer after announcing that it is making good progress on its strategic priorities and
now expects to exceed the targets it originally set for 2016.
The portfolio’s outperformance was also supported by our holdings in the banking sector, namely JPMorgan and BNP Paribas. Some
might suggest ‘this’ or ‘that’ is the reason these businesses have rallied so strongly over the past three months. The reality is far more
pedestrian. Low valuation creates its own catalysts, and the low valuations of these banks have allowed them to jump in response to
unforeseen events. The shares were simply cheap enough to respond positively.
Publishing company Time Inc continued to support fund returns amid ongoing of merger & acquisition newsflow. The firm rejected a
bid worth close to $1.8 billion from a consortium backed by the head of Warner Music Group. We built our holding a year ago as the
shares looked significantly undervalued and management has been taking steps to reduce costs and pay down debt.
Office supplies retailer Staples was the main individual detractor over the month, although there was no specific newsflow driving this
share price performance. Staples is continuing with its efforts cut costs by closing underperforming stores in the US and is
strengthening its online presence. It is also selling some of its international operations and has announced plans to sell a controlling
interest in its European operations to Cerberus Capital.
Clothing retailer Gap was another detractor. This is a position that we added to the portfolio over the summer. The shares have been
under pressure from worries over waning sales per store and costly operating leases. However, we feel that the balance sheet is not
overly stretched. The dividend yield is around 4% and is comfortably covered by free cashflow generation. Given the substantial fall in
the share price in recent years, we feel this represents an opportunity.
The market outlook and portfolio strategy
We have built a new position in KIA Motors which we feel is trading on an attractive valuation and has a relatively solid balance sheet.
We note that Kia has a strong position in the domestic Korean market and has been focusing on growing overseas. It has an
advantage over many European manufacturers in that most of its cars sold in the EU are produced in Slovakia which has relatively low
labour costs. While average selling prices are low compared to other brands, surveys show KIA cars are perceived by customers as
good quality. The company’s gross profit margins are in line with the industry average, despite lower selling prices.
We have now fully exited the position in Fairfax Financial as the shares have made substantial gains since we acquired the position in
December 2013.
*Schroder International Selection Fund. 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. 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 Fund will not hedge its market risk in a down
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1
Source: Schroders, A Acc, NAV to NAV (bid to bid).