For professional investors and advisers only
Why is it important to have a fund like this available to investors?
In this environment of sustained low growth, capital returns are under pressure and yields, around the world, are low. As such, investors are increasingly being forced to search for income. Not only can exposure to risk assets come with greater volatility and downside risk, but traditional sources of income do not offer the yields they once did. As a consequence, savers and pensioners who increasingly rely on investment income to support their standard of living, are finding it harder to meet their income needs. Demand for a reliable and welldiversified income stream from clients globally has never been stronger. Since the fund's launch
– two and a half years ago – assets under management have reached over $6.5 billion 1 , with flows coming from Asia, Europe, Latin
America and the Middle East.
A global, multi-asset approach that seeks out sustainable income from a range of asset classes can provide an income solution even in this low rate environment.
Why a multi-asset approach for income?
A multi-asset approach to income investing means more flexibility by broadening our investment universe and focusing on neglected areas of the market. We are able to invest across a wide range of asset classes that offer diversification, yield pick up and sustainable income streams. This includes our equity security selection which has developed a systematic process for identifying high yield quality stocks, our fixed income security selection which includes global high yielding, investment grade and emerging bonds and our alternatives security selection which includes infrastructure and property.
Since we focus on quality as well as yield, we invest in high quality stocks and bonds where the yield is backed by stable fundamentals in order to provide a more sustainable income.
Can you tell us a bit about the team behind this fund?
I am the overall fund manager supported by a multi-disciplinary ‘Global Income’ team focussed on generating income across asset classes. It is a team of six divided into three groups with distinct responsibilities: equity, fixed income and multi-asset. Each team is then supported by their own specialist teams providing investors with access to over 200 investment professionals. We are in daily contact and share information on market movements and positions. We meet frequently to identify opportunities and risks, to discuss themes and to analyse the positioning of the fund.
How has the fund achieved its income target thus far?
The investment universe includes high dividend equities, investment grade bonds, high yield bonds, emerging market debt (local and USD), property and infrastructure (both accessed via liquid listed companies), and other fixed income sectors such as municipals, MBS or ABS.
There are asset class ranges in place to ensure sufficient flexibility and diversification in our risk allocation and to help reduce cyclical drawdown risk.
By applying our principles for sustainable income investing we have been able to distribute our annual income target of 5% during the past year, and, including this distribution, the strategy has produced an annualised performance of
6.4% (to the end of February) since inception
(USD A Acc share class. Inception date is 18
April 2012).
Can you describe the investment process?
The investment process is driven by our flexible top-down asset allocation and risk management, but also incorporates a bottom up, unconstrained approach to investing.
I am responsible for allocating dynamically between bonds, equities and cash and for risk management at the fund level. Our asset allocation uses risk-premia based research which is at the heart of Schroders’ multi-asset process with a focus on avoiding unrewarded risk.
The objective of our equity selection is to target a yield 1.5% higher than MSCI World but with dividend growth that is typically much faster than the market. The team analyses a universe of
15,000 stocks to create a diversified fund and we invest in companies offering a high yield which are also profitable and stable. The diversified nature of the portfolio reduces stock-specific risk.
There are three component asset classes within fixed income: investment grade, high yield and emerging market debt (USD and local). The team analyses global investment themes, yield curves and country risk to form a top-down view.
The bottom-up view on individual issuers is a function of an assessment of valuation and credit fundamentals. The team targets higher yielding securities favouring less cyclically oriented, stable cash flow business profiles.
Finally, our ongoing risk management includes monitoring region, sector and security level exposures, together with their yields, across the fund and for managing the risks from currency, duration, credit and equity.
How do you limit drawdowns during adverse market conditions?
Managing risk is key to minimising drawdowns.
We manage the risks from unrewarded betas within the fund including the flexibility to hedge duration and equity market risk. The drawdowns
*Schroder International Selection Fund is referred to as Schroder ISF throughout this document.
1 Source: Schroders, as at 27 February 2015.

suffered by a global income portfolio with a quality bias during the global financial crisis were significantly less than single asset class strategies.
To protect investor capital, we employ an active approach to risk management by fully understanding the risks inherent within the portfolio and hedging certain portfolio risks when required. For example, in June 2013, we hedged the majority of the fund's emerging currency exposure, reducing the portfolio's duration from
3.6 years to less than 2 years. This helped to protect the portfolio during the market turbulence last summer.
Which asset classes do you favour at the moment?
Pursuing a highly diversified multi-asset approach, which is global, flexible and unconstrained, and underpinned by a focus on quality and valuation, should place the strategy in a strong position to navigate the challenges and take advantage of the opportunities presented by an interest rate tightening environment. This is particularly important given that such an environment is characterised by lower returns, higher volatility and diverging regional asset class performance.
Equities are our preferred asset class and currently represent slightly above 40% 2 of the portfolio, but we are hedging as required in periods of macro weakness. This is relevant given our expectation for a higher level of volatility as we move towards an interest rate hike in the US.
We currently favour the information technology and telecoms sectors, while, in terms of region, we see the best value across Asia and emerging markets which should benefit from increasingly accomodative EM central bank policy.
We have recently reduced our overall fixed income exposure, particularly the high yield and emerging market debt local currency and sovereign exposures. We have rotated out of
European investment grade into US investment grade, where valuations are currently more attractive. We also reduced EM dollar bonds into EM local bonds to take advantage of falling inflation and prospective policy easing across
EM nations.
Investment process – common elements across equities and bonds
122
120
118
116
114
112
110
108
106
104
102
100
98
96
Stage 1
Stage 2
Stage 3
Asset allocation
Aymeric Forest and
Iain Cunningham
Security selection
Equity Portfolio Managers
Ben Corris and
Stuart Adrian
Fixed Income
Portfolio Managers
Lucette Yvernault and Sarang
Kulkarni
Risk management
Performance chart
Aymeric Forest and
Iain Cunningham
Annualised volatility
Schroder ISF Global Multi-Asset Income 4.0%
Mar 2012 Sept 2012 Mar 2013
– Risk-adjusted yield opportunities underpin asset allocation
– Unconstrained region and sector allocation.
– Quality bias: focus on stable and growing cash flows
– A universe of 25,000 securities to maximise opportunities.
– Monitoring region, sector and security level
– Managing currency, duration, credit and
Sept 2013 exposures across portfolio equity risks.
Mar 2014
Schroder ISF Global Multi-Asset Income
Sept 2014 Mar 2015
1 year
%
4.1
Year to date
%
2.4
Since inception* p.a.
%
6.4
Yield**
%
5.1
Schroder ISF Global Multi-Asset Income
Source: Bloomberg, 28 February 2015, A Acc share class, net of fees. *Annualised performance since inception date of 18 April 2012. Volatility is calculated using daily returns since inception. All fund performance data are on a NAV to NAV basis, net income reinvested.**Yield is the next 12 months dividend yield using Schroders’ forecasts for the equities and using the current effective yield to maturity for the fixed income; it is gross of withholding tax.
Fund Manager Biographies
Aymeric Forest , Head of Multi-Asset Investments Europe, joined Schroders in May 2011. His investment career began in 1996. Aymeric is the lead manager of Schroder ISF Global Multi-Asset Income and responsible for investment on behalf of European Multi-Asset clients and complex segregated mandates. He is also a member of Global Asset Allocation Committee and the Volatility Risk Premia group leader. Prior to joining
Schroders, Aymeric was Global Head of Investment Solutions at BBVA in Madrid responsible for the multi-asset products. He was also Head of
Tactical Asset Allocation quantitative strategies and senior fund manager at ABN AMRO. He is a CFA Charterholder and has a Masters degree in
Finance, Nancy 2 University (France), Giessen (Germany) and Lund (Sweden).
2 Source: Schroders, as at 27 February 2015.
Risk considerations : 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 . The capital is not guaranteed. The fund intends to make regular fixed distributions to investors and, if its income is insufficient to cover these payments, these payments may reduce the fund's capital. All equity forward sales are with a single counterparty. In case of default, the relevant equities will be sold in the market and this may affect performance. 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. The fund may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate. The fund may be leveraged by trading in a high volume of derivatives to achieve a risk target consistent with its risk profile. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or HYPERLINK "http://www.schroders.com"www.schroders.com contains additional disclaimers which apply to the third party data. 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. w46779