For professional investors and advisers only
Schroders
European equities
SCHRODERS | EUROPEAN EQUITIES
Schroders
European equities
Schroders has a proud heritage of investing in European equities and we have built a
successful and sizeable business in this asset class. We manage over €20 billion* of
assets across a comprehensive range of European equity strategies, from traditional equity
investing, such as growth and value, to alternatives such as absolute return.
We have managed European equities since 1979 and the asset class remains a strategic
priority for us. As one of the largest investment teams at Schroders, we have dedicated
significant resources to maintaining the high standards we set for ourselves and to deliver
strong results for our clients.
Across our different strategies our mission is the same: to deliver long-term outperformance
and first-class service to all of our clients.
Each of the strategies we offer has distinct characteristics allowing investors access to
European equities in a number of styles. This brochure aims to provide an understanding of
these different strategies.
Extensive research know-how
We believe that equity markets are inefficient, and only an active asset manager with
the right resources can truly take advantage of their full potential. As a result, we take a
distinctive approach to research and continually invest in our capabilities. Over the past
four decades we have built a first-class team of highly experienced analysts and portfolio
managers who are committed to in-depth, independent research to develop a platform to
generate outperformance. This is what sets us apart.
Our portfolio managers and analysts are empowered to find the best investment
opportunities across Europe’s equity markets, drawing on both internal and external
expertise to identify individual stocks which are inefficiently valued by the market. Our
internal team of equity analysts covers a wide range of sectors across the market cap
spectrum, enabling us to uncover opportunities from a broad investment universe.
Our scale and strength of franchise has helped us establish close relationships with
company management, which enables us to develop a true understanding of the
businesses we invest in. This forms an integral part of our research process.
Our approach to equity investing
At Schroders, our European equity portfolios fall into five different investment strategies.
Each strategy has its own distinct philosophy and process aimed at exploiting different
market inefficiencies and capable of delivering specific outcomes for investors, such as
capital appreciation, regular income or risk-controlled growth, among others.
*Source: Schroders, as at 31 December 2015.
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SCHRODERS | EUROPEAN EQUITIES
Blend
Alternatives
European equities
Small
cap
Business
cycle
Income
Blend
Our blend strategies are managed with no pre-determined style bias. We therefore aim
to add value regardless of the market backdrop, using a disciplined bottom-up approach
which leverages the strength of our research capability.
Business Cycle
Our business cycle strategy combines top-down macro views with bottom-up analysis.
It rests on our belief that different types of companies perform very differently, depending
on where we are in the economic cycle.
Income
Income investing targets stocks that pay out a regular income, usually through
dividends. We want above average income at the portfolio level but a clear valuation
case to offer us capital growth as well.
Small Cap
Small-cap investing can be potentially lucrative as small-cap companies can offer
high growth potential compared to their mid- and large-cap counterparts. A lack of
analyst coverage can also mean small-caps are incorrectly priced, offering investors the
opportunity to profit.
Alternatives
Within our alternatives strategies, our absolute return funds aim to deliver positive returns
across all market conditions. They are typically benchmark-unconstrained and often
employ different investment techniques compared to traditional long-only funds, such as
short selling, leverage and derivatives.
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SCHRODERS | EUROPEAN EQUITIES
European equities:
Blend
Blend
Alternatives
Blend
Small
cap
Business
cycle
Income
Fund management team
Why invest?
– Benefit from a diversified portfolio of both growth and value assets
–Aims to generate consistent outperformance across different market environments with lower
relative volatility
–Extensive bottom-up research from our highly-experienced analyst team enables us to identify
mispriced opportunities as well as ‘catalysts for change’ in a company, such as an improving
demand outlook or management change.
Martin Skanberg
Our philosophy
We believe extensive bottom-up company research and analysis is key to generating alpha. We employ
a team-based approach that leverages the skills and experience of our sector analysts, while our scale
allows us outstanding access to companies, which helps to underpin our fundamental research process.
Investment process
In order to maximise alpha opportunities, we look at the market valuation of a stock and assess what
that price implies about the market’s expectations for the company. We then aim to demonstrate where
our projections differ from the market, in terms of sales growth, operating profitability or balance sheet
returns. This ‘difference’ compared to market expectations forms the basis of the investment thesis.
Sam Twidale
However, valuation alone is not usually enough for us to buy a stock so we’re also searching for an
inflection point or a ‘catalyst for change’. An inflection point is a credible potential catalyst, such as an
improving demand outlook, management change, cost restructuring, capital allocation, dividend policy,
merger and acquisition activity or disposals. The combination of these two elements – valuation and the
inflection point – then informs the strength of our conviction call.
Implied market valuation
Inflection point thesis
Conviction
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Fund
Index
ISIN
Schroder European Fund
FTSE World Europe ex UK
GB00B76V8C37
SCHRODERS | EUROPEAN EQUITIES
European equities:
Alternatives
Business Cycle
Blend
Business
Business
cycle
cycle
Small
cap
Income
Fund management team
Why invest?
– Aims to consistently outperform throughout the different phases of the business cycle
–By combining bottom-up stock selection with top-down macro views, the portfolio benefits from
companies that perform well on a fundamental basis and are aligned to the prevailing stage of the
business cycle
– The lack of a permanent style or size bias enables us to avoid prolonged periods of underperformance.
James Sym
Investment process
We describe ourselves as pragmatic business cycle investors. We do not believe that companies operate
in a vacuum independent of economic and business cycles. We seek to understand the behaviour
of earnings from operationally geared cyclical companies, often versus defensive large companies.
Determining the price drivers of such companies will often reveal completely uncorrelated performance
across industry sectors. Our investment process therefore separates the stock universe into seven style
groups each with specific sensitivities to certain macro drivers. This, along with standard fundamental
analysis, allows us to identify mispriced securities:
1.Growth
Slowdown
Recession
Recovery
Expansion
Growth
Growth defensives
Industrial cyclicals
Growth
Growth defensives
Value defensives
Consumer cyclicals
Consumer cyclicals
Value defensives
Financials
Financials
Commodity cyclicals
Financials
Growth
Growth
Industrial cyclicals
Consumer cyclicals
Consumer cyclicals
Commodity cyclicals
Growth defensives
Commodity cyclicals
Commodity cyclicals
Growth defensives
Financials
Industrial cyclicals
Industrial cyclicals
Value defensives
Value defensives
2.Growth defensives
3.Value defensives
4.Financials
Overweighting
5.Consumer cyclicals
6.Commodity cyclicals
7.Industrial cyclicals
Style groups
Steve Cordell
Our philosophy
We aim to capture the best European opportunities by understanding the companies most likely to
outperform at each stage of the ‘business cycle’, namely expansion, slowdown, recession and recovery.
We believe in a diversified approach that achieves consistent outperformance with a risk profile that
changes according to the phases in the business cycle as we believe different companies should
outperform at different stages of the economic cycle.
Market
Underweighting
Each group will perform differently depending on the stage of the business cycle. We will adjust the fund’s
risk levels and positioning so that it has the appropriate weighting to each of these different groups as we
move through the business cycle. We avoid any permanent investment style bias by managing the tilts
towards these groupings within the portfolio.
Fund
Index
ISIN
Schroder European Opportunities
FTSE World Europe ex UK
GB0007221889
Schroder European Alpha Plus
FTSE World Europe ex UK
GB00B7LDKR32
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SCHRODERS | EUROPEAN EQUITIES
European equities:
Blend
Alternatives
Income
Small
cap
Business
cycle
Income
Income
Fund management team
Why invest?
–The lack of a permanent style or size bias enables us to avoid prolonged periods of underperformance.
– Targets a high income with some long term capital growth
–Invests in a concentrated portfolio of European equities, adopting a business cycle investment
approach – one that recognizes that different stocks have the potential to outperform at different
points in the economic cycle
James Sym
James Rutland
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Our philosophy
We believe in a diversified approach that aims to achieves consistent outperformance with a risk profile
that changes according to the phases in the business cycle. With a core focus on income-orientated
investments, the investment process groups stocks into different income categories which perform well at
different points in the cycle.
Investment process
The bottom-up element forms a more important part of the overall process for this concentrated
portfolio. There are fewer “factor” based decisions. The bottom-up process is rigorous; it typically begins
with analysis using a proprietary 3 factor, 90-data item database, then drills down quantitatively into
the history of the business from an income perspective, and the likely future trajectory of the growth,
sustainability and level of that income, before finally meeting with the company of sell-side analysts to
conduct qualitative analysis. A key part of the process is the meetings with the management teams of
the companies themselves, mainly through one on one meeting but also through group meetings and
attendance at company capital markets days. When attempting to understand an individual business,
James will also try to meet with competitors, suppliers and other related businesses in order to gain a
deeper understanding of the specific industry. The resources on offer from the sell side are also used
selectively, as well as independent experts and any other sources of information that can help with their
understanding of an investment case.The aim is to gain an insight into the culture of the management
towards dividends and the ability of the company to support a progressive dividend.
Factor
Data example
Goal
Dividend history
– 10 year history
– Growth in shares in issue
To establish whether the company
has a strong dividend track record
Income flexibility
– Operational and financial general
– Working capital intensity
– Capex intensity
To establish the extent to which
the P&L is a constraint on paying
dividends
Balace sheet strength
– Debt ratios
– Q score
To establish whether the balance
sheet can support a progressive
dividend policy
Fund
Index
ISIN
Schroder European Alpha Income
FTSE World Europe ex UK
GB00B6S00Y77
SCHRODERS | EUROPEAN EQUITIES
European equities:
Alternatives
Small cap
Blend
Small
Small
cap
cap
Business
cycle
Income
Fund management team
Why invest?
–Small caps tend to have higher and longer-term growth potential than their large-cap counterparts
–Successful small caps are often subject to M&A activity which can have a positive impact
on performance
–We have a dedicated pan-European small- and mid-cap investment team with an average of 18 years’
experience, who are able to identify the hidden value of small caps caused by a scarcity of information.
Luke Biermann
Our philosophy
We believe that small cap markets are inefficient, presenting significant mis-priced opportunities for
investors to take advantage of. Through a deep bottom-up approach, we seek to identify companies with
strong long-term growth prospects based on three criteria:
1. The quality philosophy: finding the rare companies, with sound fundamentals, that persistently perform
2.The unloved but willing to change (value): companies that have historically performed badly,
where there is a distinct catalyst for change
3.The compelling themes: identifying long-term themes yet to emerge and the winners and losers of
structural change.
Investment process
Company visits are a vital part of our research process. Our close relationship with company
management and our intensive programme of company contacts ensure that we are fully aware f all
relevant issues.
We use quantitative screens to highlight potential investment opportunities, incorporating a variety of
growth, return and valuation factors. Whilst screens are not intended to drive stock selection, they
can be useful in helping to prioritise and focus our research as well as to reinforce or challenge our
fundamental views.
As a result of our fundamental research, we classify companies and industries in the investment universe
within the following simple framework – the ‘investment triangle’:
Favourable
Companies in industries where demand for
their goods or services exceeds supply,
giving them pricing power
A
C
B
Avoid
Companies in industries where supply
exceeds demand, typically experiencing
long-term decline and few growth
opportunities. The supply of shares in
these companies tend to exceed
demand, leading to downward pressure
on share price
Trade
Companies are usually cyclical stocks or franchises in transition, among which we look for trading opportunities
Fund
Index
ISIN
Schroder European Smaller Companies
Euromoney Smaller European
Companies Total Return
GB00B76V5M20
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SCHRODERS | EUROPEAN EQUITIES
Alternatives
European equities:
Alternatives –
Absolute Return
Blend
Small
cap
Business
cycle
Income
Income
Fund management team
Why invest?
– Long/short investing can enable investors to benefit from rising and falling markets while limiting
market exposure
– Low correlation with equity indices providing valuable diversification
–Absolute return strategies can offer downside protection when markets are distressed
– A strong performance track record and history of capital preservation.
Steve Cordell
Our philosophy
We believe the key to successful absolute return investing is having a clearly defined and disciplined
approach. We carry out extensive and in-depth research to identify the most appropriate investment
opportunities, wherever they may exist across the equity spectrum. This enables us to construct high
conviction portfolios of carefully selected stocks in order to deliver stable, long-term positive returns
with low volatility.
Investment process
Managed by Steve Cordell, the fund employs our ‘business cycle’ approach, a flexible strategy that
avoids a permanent investment style bias and aims to capitalise on opportunities according
to the stage of the economic cycle. For example, in a recovery phase, the fund typically takes long
positions in industrial and consumer cyclicals and shorts the defensive style groupings. Conversely, in
a recession, the fund will typically be long defensives and short cyclicals. As such, the fund may take
directional views although it is still a broadly market neutral strategy.
By focusing on identifying turning points in the business cycle, the fund can shift its positioning ahead
of the market so that it has the potential to deliver absolute returns in all phases of the economic cycle.
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Fund
Index
ISIN
Schroder European Absolute Target
N/A
GB00B39VWX15
SCHRODERS | EUROPEAN EQUITIES
Schroders’
European equities
fund range
Blend
Business Cycle
Income
Fund
Schroder European
Fund
Schroder European
Opportunities Fund
Schroder European
Alpha Plus Fund
Schroder European Alpha
Income Fund
ISIN
GB00B76V8C37
GB0007221889
GB00B7LDKR32
GB00B6S00Y77
Typical no.
of stocks
50–60
60–80
30–40
35–50
Inception date
1987
1989
2003
2012
Small Cap
Alternatives
Fund
Schroder European
Smaller Companies Fund
Schroder European
Absolute Target Fund
ISIN
GB00B76V5M20
GB00B39VWX15
Typical no.
of stocks
50–70
30–50 long and short
Inception date
1989
2008
Source: Schroders, as at March 2016.
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About Schroders
£324.9 billion managed across
equities, fixed income,
multi-asset, alternatives
and real estate.
An extensive global network
of 3,700+ employees.
38 offices in 28 countries
across Europe, the Americas,
Asia, the Middle East and Africa.
Over 200 years’ experience
of investment markets.
Source: Schroders, as at 31 March 2016.
To find out more please visit
www.schroders.com
or speak to your Schroders representative
For professional investors only. Not suitable for retail clients. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders
has expressed its own views and opinions in this document and these may change. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice,
or investment recommendations. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as
well as up and investors may not get back the amounts originally invested. Risk Factors: Schroder ISF European Absolute Target, European, European Alpha Plus and Smaller
Companies funds: the funds hold investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from
them, to rise or fall. Schroder ISF European Absolute Target, European Alpha Income and European Opportunities funds: funds that invest in shares may be more volatile than
funds investing in bonds, but that may also offer greater potential for growth. Schroder ISF European Absolute Target fund: by employing synthetic shorting techniques, this fund will
establish both ‘long’ and “short” investments. As a result, it will hold positions that will rise in value as the market falls and fall in value as the market rises. The fund may use derivatives
and forward transactions for investment purposes. This involves special risks which may significantly raise the risk profile of a fund and increase its volatility when taking additional market
or securities exposure. Schroder ISF European Alpha Income fund: As a result of the fees being charged to capital, the distributable income of the fund may be higher but there is the
potential that performance or capital value may be eroded. Schroder ISF European Alpha Plus and European Smaller Companies funds: funds which invest in a smaller number
of stocks can carry more risk than funds spread across a larger number of companies. Issued in May 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA.
Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK10691. 48678