assessment of value report - schroders

Assessment of Value ReportApril 2020

James Rainbow Chairman of Schroder Unit Trusts Ltd

Our aim is simple - to help our clients plan for the future with ideas and investments built to stand the test of time. I’ve worked at Schroders through all types of market conditions. It means I have seen first-hand how the company’s deeply-ingrained culture leads us to the right decisions, regardless of how tough the environment gets.

We always focus on doing the right thing for our clients, but also for our people and for wider society. It’s about delivering positive outcomes for all.

As part of this continued commitment to clients, we are publishing our first Assessment of Value Report. This follows new reporting obligations from our regulator, the Financial Conduct Authority (FCA), designed to strengthen fund governance and transparency. Companies such as ours, known as an Authorised Fund Manager (AFM), must consider robustly and in detail whether we are delivering value to our investors across a range of areas in an annual, publically available report.

The data for this report was collected at the end of 2019. Since then, a lot has changed. As I write this statement in April 2020, we are in the midst of an unprecedented period socially and economically. The disruption caused by the spread of Covid-19 means the year ahead will be challenging for all of us. At such a time it is as important as ever that we ensure we are delivering value to our investors. This is our primary objective and we fully support the FCA’s initiative.

We hope this report will help promote enhanced transparency, governance and outcomes for all investors, ultimately strengthening trust in the asset management industry.

We have given our approach to producing this report a great deal of thought. We believe the result is a rigorous process for assessing value. Naturally, it considers all the relevant information and data investors need. We have also sought to introduce governance structures that make sure we’re measuring value in the best possible way. We have worked with third-parties to ensure our report is robust and clear for our investors to understand.

As well as using external experts to validate our approach, we tested how we report our findings with private investors and advisers. We wanted to make sure the structure and content of this report made sense to you.

There are always opportunities for improvement and it is important that we are not complacent. This report identifies that certain funds are not demonstrating value consistently, particularly in the Performance area. Where this is the case, we have completed a further review and shared the measures that we have taken, or plan to take, to remedy the issues we’ve identified.

One significant change is that we are planning to introduce an all-in fee structure. What’s more, there will be savings for our investors resulting from our other implemented and planned measures. These include:

1. The conversion of nearly 26,000 investors to cheaper share classes

2. Fee reductions for specific funds

3. The planned introduction of scale discounts for funds larger than £1 billion, across all retail share classes

As at the end of 2019, we estimated such savings to be £8 million per year.

More details on each of these are provided in the relevant sections in this report.

We are proud of our long history of adapting to meet the challenges of the times and keeping our focus on delivering value to our clients at all times. In these uncertain markets, we are going to see greater opportunities for active managers like us to differentiate and demonstrate value to our clients.

We hope this report reassures and empowers our clients, providing a transparent and clear breakdown of the overall value that our funds provide.

Chairman’s letter

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Contents

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Key: Demonstrating value

Completed a further review, demonstrating value

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Schroder Advanced Beta Global Corporate Bond Fund 8

Schroder Advanced Beta Global Sovereign Bond Fund 10

Schroder Advanced Beta UK Equity Fund 12

Schroder All Maturities Corporate Bond Fund 14

Schroder Asian Alpha Plus Fund 16

Schroder Dynamic Planner Portfolio 3 18





Schroder Fusion Managed Defensive Fund 28

Schroder Fusion Portfolio 3 30





Schroder Global Cities Real Estate Income 40

Schroder Global Cities Real Estate Securities 42

Schroder Global Diversified Income Fund 44

Schroder Global Emerging Markets Fund 46

Schroder Global Equity Fund 48

Schroder Global Multi-Factor Equity Fund 50

Chairman’s letter 1

Introduction 5

Our approach to assessing value: the seven areas 6

Your individual fund report 8

Glossary 180

This document has interactive elements, please click the text menu below to navigate to that page.

Click this icon (situated in the top right of each page) to return back to the contents page.



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Schroder High Yield Opportunities Fund 52

Schroder India Equity Fund 54

Schroder Institutional Pacific Fund 56

Schroder Institutional UK Smaller Companies Fund 58

Schroder Long Dated Corporate Bond Fund 60

Schroder MM Diversity Fund 62

Schroder Monthly Income Fund 64

Schroder Multi-Asset Total Return Fund 66

Schroder Sterling Broad Market Bond Fund 68

Schroder Sterling Corporate Bond Fund 70

Schroder Strategic Bond Fund 72

Schroder Strategic Credit Fund 74

Schroder Sustainable Multi-Factor Equity Fund 76

Schroder UK Dynamic Absolute Return Fund 78

Schroder UK Dynamic Smaller Companies Fund 80

Schroder UK Real Estate Fund 82

Schroder UK Real Estate Fund Feeder Trust 84

Schroder UK Smaller Companies Fund 86

Schroder US Equity Income Maximiser 88

Schroder US Mid Cap Fund 90

Schroder US Smaller Companies Fund 92

Schroder Absolute Return Bond Fund 94

Schroder Advanced Beta Global Equity Small and Mid Cap Fund 96

Schroder Advanced Beta Global Equity Value Fund 98

Schroder All Maturities Index Linked Bond Fund 100

Schroder Asian Income Fund 102

Schroder Asian Income Maximiser 104

Schroder Core UK Equity Fund 106

Schroder Diversified Growth Fund 108

Schroder Dynamic Multi Asset Fund 110

Schroder European Alpha Income Fund 112

Schroder European Alpha Plus Fund 114



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Schroder European Equity Absolute Return Fund 116

Schroder European Fund 118

Schroder European Recovery Fund 120

Schroder European Smaller Companies Fund 122

Schroder Flexible Retirement Fund 124

Schroder Gilt & Fixed Interest Fund 126

Schroder Global Equity Income Fund 128

Schroder Global Healthcare Fund 130

Schroder Global Recovery Fund 132

Schroder Income Fund 134

Schroder Income Maximiser 136

Schroder Managed Balanced Fund 138

Schroder MM Diversity Balanced Fund 140

Schroder MM Diversity Income Fund 142

Schroder MM Diversity Tactical Fund 144

Schroder MM International Fund 146

Schroder MM UK Growth Fund 148

Schroder Moorgate I Fund 150

Schroder Prime UK Equity Fund 152

Schroder QEP Global Active Value Fund 154

Schroder QEP Global Core Fund 156

Schroder QEP Global Emerging Markets Fund 158

Schroder QEP US Core Fund 160

Schroder Recovery Fund 162

Schroder Responsible Value UK Equity Fund 164

Schroder Small Cap Discovery Fund 166

Schroder Tokyo Fund 168

Schroder UK Alpha Income Fund 170

Schroder UK Alpha Plus Fund 172

Schroder UK Equity Fund 174

Schroder UK Mid 250 Fund 176

Schroder UK Opportunities Fund 178

Introduction

Throughout this report, the Schroder Unit Trust Limited (SUTL) Board, will be referred to as ‘we’.

Who is the report designed for?

The annual Assessment of Value report is aimed at individuals who invest in our UK-domiciled fund ranges or their advisers. It outlines each fund’s assessment and concludes on whether we believe that we have demonstrated value.

How should you use it?

We recommend that you take time to read the ‘Seven areas’ section to understand how we have made our assessment, which has been conducted using data as at 31 December 2019.

You should review the reports for each fund that you are invested in and decide whether you feel the product is still suitable for your needs and delivering what you expected from it.

The report complements other fund documentation such as the Factsheet and the Key Investor Information Document (KIID). If you wish to see the underlying performance data in conjunction with this document please refer to the relevant fund’s latest factsheet or KIID (if applicable) or otherwise to the fund’s most recent financial report. A link to these can be found at the bottom of each fund’s report.

The document is interactive, please use the Contents page to navigate your way around it.

Our conclusions on each fund are set out separately in each individual fund’s report.

What will it tell you?

The FCA has asked us to look at seven specific areas when assessing the value we deliver to our investors:

1. Performance – has the fund performed in line with expectations?

2. Quality of service – are we meeting expectations on the service we deliver?

3. General costs of the authorised fund manager – are the fees charged to the fund reasonable and appropriate?

4. Comparable market rates – how do our fees compare against competitors?

5. Economies of scale – do funds enjoy cost savings as they grow?

6. Comparable services – how do the fees we charge your fund compare with what we charge clients for similar products?

7. Classes of shares or units – are you in the most appropriate type of share or unit?

Please follow the link here to find the detail of the regulation in COLL 6.6.21.

How we determined the overall value delivered by a fund?

Each area is considered separately for every fund and is given equal weighting. This contributes to an overall assessment as to whether or not we believe that we have delivered value to our clients. This incorporates both qualitative information as well as quantitative data.

How have we produced the report?

The Product Governance Team at Schroders is responsible for the delivery of the Assessment of Value report. It validated its methodology for the Assessment of Value with support from an independent consultancy to ensure its robustness and impartiality. Once the assessment was completed, the findings were presented to several governing bodies, the Product Governance Committee and the SUTL board, who reviewed and validated the conclusions drawn.

It is the responsibility of the SUTL board of directors to consider the outcomes of these assessments and to ensure that they are clear and fair. The board, which includes a number of Independent Non-Executive Directors (INEDs), is responsible for representing the best interests of investors and challenging the approach taken where necessary.

In this report we communicate if we have delivered value or, if not, where we need to improve and what changes we are proposing.

What do the icons used throughout the report represent?

We have used iconography to help you understand the outcome of our assessment of each area.

Where an area has this icon, we believe that the fund is demonstrating value in that area.

Where an area has this icon we have concluded that the fund is demonstrating value in that area. However, our initial quantitative review indicated that further qualitative analysis was required before a conclusion could be drawn. We believe the combination of these reviews ensures you are provided with a comprehensive conclusion.

Where an area has this icon, we recognise that the fund is not demonstrating value in that area consistently. We have completed a further review and shared or will shortly be sharing the outcomes with you.

What to do if you have any questions

You can contact us on [email protected] if you have any further questions. If you have an adviser you may wish to discuss your questions with them.

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https://www.handbook.fca.org.uk/handbook/COLL/6/6.html

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Performance

Quality of service

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Our approach to assessing value: the seven areas

For each of the seven areas, we have considered the following detail as part of our assessment

We think clients can reasonably expect funds to meet their investment objectives, albeit with the knowledge that they are not guaranteed. To give us an indication of how well a fund is doing this, we assess the returns of each share class over the performance period, which is the length of time over which we expect the fund to deliver its investment objective. If we’ve given a range of time, then for the purposes of this report we look at the upper end of the range.

For example, if the range is three-to-five years, we assess the delivery of the investment objective over five years. We acknowledge that sometimes funds will underperform their investment objective given their particular investment style. We consider a number of measures over that time period to make a judgement on whether or not the investment objectives are being met, including specific levels of income or volatility (the fluctuation of performance).

Several elements contribute to the service we offer all of our clients. We assess whether we are delivering each of these well enough to create value for our clients.

We assess whether key aspects of fund operations have met or exceeded the rigorous internal and external standards that have been set for them. These standards, known as Key Performance Indicators (KPIs), enable Schroders to provide both accurate and timely financial reporting to both our clients and the regulators.

The strength of our investment process for each fund is validated by several independent external rating agencies. The Fitch Investment Management Quality Rating (IMQR) considers our Investment Process, Investment Resources, Risk Management, Investment Performance

and Company and Client Servicing. It rates the service that Schroders provides as ‘Excellent’. Additionally, in 2019 Schroders was one of four investment companies to be awarded the top rating by investment research firm Square Mile in its ESG Integration and Responsibility ratings.

We also review our own governance around liquidity and risk management to ensure that the policies and procedures we have in place are robust and fit for purpose.

The client experience that we provide is evaluated internally, using internal and external metrics provided from surveys such as the Citywire Service Study. This provides us with a holistic view of the client experience.

We review every cost component of the Ongoing Charges Figure (OCF) at a share class level. This includes a detailed assessment of our management, administration and ‘other’ costs (see the glossary for a definition of the OCF). We then compare these costs against what we charge our investors. This is to ensure that they are appropriate, while at the same allowing us to:

– Remain a well-capitalised business

– Continue to operate during stress scenarios

– Continue to innovate and develop new products

Schroders has decided to move to an “all-in fee” to make charging structures simpler and easier to understand. This means that clients will pay a single fee which will be set with reference to the OCF. We will communicate the timelines for delivery as soon as possible.

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Economies of scale

Comparable market rates

Comparable services

Classes of shares or units7

We assess whether there are potential economies of scale in the fund and whether or not these have been achieved in practice. If that is the case, we then consider whether that benefit is being reflected in lower charges for clients. Every fund can, in theory, benefit from economies of scale but whether or not your fund does will depend on the overall fund size.

A fund can generate economies of scale as it grows. This is because we are able to manage larger funds more efficiently, meaning that our costs of managing the fund decrease as the size of the fund grows. We have determined that funds

generally generate meaningful economies of scale when a fund grows to assets under management of £1 billion, although this can vary depending on the type of investments that we manage for you.

We have therefore determined that it is appropriate that we share some of these savings with you. This means that we will soon be implementing scale discounts in retail share classes for every fund that is larger than £1 billion.

We assess the amount we charge our investors at a share class level by comparing the price of our funds against the price of peers in the relevant Investment Association (IA) Sector. As the investment approach of funds in an IA Sector can vary, we also assess each fund against a customised peer group.

The funds in the customised peer groups are selected by an independent third party on the basis that they are more directly comparable than other funds in the IA Sector.

We manage money for a range of different clients all over the world including individuals, charities, pension schemes and large institutions. Some of that money is managed in the same way as your fund. Where this is the case, we have compared different types of clients and the services that they receive in relation to the fees that we charge.

This is to ensure they are reasonable and appropriate. If we identify that there are disparities which may be deemed to not be reasonable and appropriate, we will be making changes to fees.

We compare the value we deliver across different classes of shares (or units) in your fund.

What are share classes?For each of our funds, we issue different types of shares (or units if your fund is a unit trust). These are called ‘share classes’ or ‘unit classes’ and can differ for various reasons. For example, you could hold a share class that was set up specifically so that you could buy it through an adviser.

How do you find what share class you are invested in?Your annual statement will highlight the share class you are invested in.

How do we assess share class charges?We review the charges across all share classes or unit classes in your fund. We look at all the share classes or unit classes that serve broadly the same purpose and compare those charges. Our aim is that our clients are invested in the share class that is the best price for them, given how they are investing and the features they are looking for. We will keep reviewing the charges on all of our share classes whenever we launch new funds or create new share classes.

What have we done to see that investors are in the right share class?We have converted nearly 26,000 investors into lower-priced share classes.

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Fund Name: Assessment outcomes1. Performance

4. Comparable market rates

5. Economies of scale

6. Comparable services

7. Classes of shares or units

2. Quality of service

1 Performance 2 Quality of service 3 General costs of

authorised fund manager

Overall conclusion

3. General costs ofauthorised manager

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Key: Demonstrating value Completed a further review, demonstrating value


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Schroder Advanced Beta Global Corporate Bond Fund

The fund seeks to provide capital growth and income in line with the Bloomberg Barclays Global Aggregate Corporate hedged to GBP (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in debt securities issued by non-governmental entities worldwide.

Taking into account all seven areas included in the assessment of value, we believe that the fund is demonstrating value overall. We have summarised our assessment of each area as it relates to this fund separately below.

We have assessed whether the fund has delivered its investment objective over the performance period of five years. Over that time period the fund has delivered on its investment objective. We have concluded that, in terms of performance, the fund is delivering value. For more detail on how we completed this assessment, please refer to the ‘Seven areas’ section in the front of this report.

In reviewing the quality of the service we provide our clients, we have assessed key service areas relating to our fund operations, our investment process and the quality of our client experience. We also looked at our liquidity management process. We concluded that we have a mature and effective framework for the oversight and reporting of liquidity risks in the funds we manage. Through all our metrics we have concluded that, in terms of quality of service, we provide value to our clients. For more detail on how we completed this assessment, please refer to the ‘Seven areas’ section in the front of this report.

We reviewed every cost component of the Ongoing Charges Figure (OCF) at a share class level. We concluded that in relation to each charge, the costs of providing the service to which the charge relates are reasonable and appropriate. For more detail on how we completed this assessment, please refer to the ‘Seven areas’ section in the front of this report.

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The assessment has been completed using data as at 31 December 2019Assessment of Value Report

Please refer to the fund’s factsheet here for performance data as at 31 December 2019.

https://www.schroders.com/getfunddocument/?oid=1.9.3516029

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Classes of shares or units

Comparable services4 Comparable

market rates 5 Economies of scaleG G G

GWe have looked at charges across all of the share and unit classes in this fund. Our assessment has concluded that there are no other share or unit classes that serve broadly the same purpose as the one you are currently in, thus we have not made any changes to your holding.

We have reviewed the fee rates of funds from Schroder Unit Trusts Limited (SUTL) against those of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. However, this fund does not have an equivalent segregated mandate or another Schroders fund which is comparable.

Our assessment found that this fund is lower-priced than the majority of its peers, and is therefore demonstrating value to our clients by being competitively priced.

The fund you invest in is not large enough (defined as fund assets under management greater than £1 billion) to realise economies of scale. Therefore it does not benefit from meaningful cost savings achieved from size. However, as it may be able to attain them as it grows, we will continue to assess this.

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Assessment of Value Report









Overall conclusion


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Schroder Advanced Beta Global Sovereign Bond Fund

The fund seeks to provide capital growth and income in line with the Bloomberg Barclays Customised Global Treasury (Gross Total Return) hedged to GBP index (after fees have been deducted) over a 3 to 5 year period by investing in a portfolio of government bonds.





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Overall conclusion


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Schroder Advanced Beta UK Equity Fund

The fund seeks to provide capital growth and income in line with the FTSE 350 (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing through investment in a portfolio of the equities of UK companies.


This fund has less than 3 years of performance history. Therefore we are unable to use this as an accurate measure of performance, which should be assessed over the time period outlined in the investment objective. We have concluded from our assessment of the performance area that we are delivering value. For more detail on how we completed this assessment, please refer to the ‘Seven areas’ section in the front of this report.



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Overall conclusion


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Schroder All Maturities Corporate Bond Fund

The fund aims to provide capital growth and income in excess of the Bank of America Merrill Lynch Non-Gilts (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in bonds issued by companies worldwide.

Taking into account all seven areas included in the assessment of value, we believe that the fund is demonstrating value overall. We have summarised our assessment of each area as it relates to this fund separately below. Where an area has resulted in an action being taken or is undergoing a further review, we have shared the steps we have taken or will take to try and improve this area with you below.




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market rates 5 Economies of scaleG A G

GWe have looked at charges across all of the share and unit classes in our funds. Find your share class in the list below to see whether we have made any changes to your holding:

– If you are invested in the A Share Class and have ongoing advice, we are not making any change to the charges as these are set up to pay your adviser an annual commission. This share class is the most cost effective share class we offer with that feature.

– If you held A Shares and you invested directly with Schroders, you have already been moved to the Z Share Class and are being charged lower fees as a result. Controls have been implemented to ensure that retail clients can no longer invest in the A share class.

If you invest in the A Share Class but no longer have an adviser, please contact us at [email protected] to discuss your options as we can move you to a cheaper share class.

We have reviewed the fee rates of funds from Schroder Unit Trusts Limited (SUTL) against those of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are lower than equivalent funds and mandates in the same investment strategy or up to 5 basis points higher (i.e. 0.05% applied to the value of the assets that we manage for you). We have therefore concluded that the fees associated with this fund are reasonable and appropriate.


The fund you invest in is larger than £1 billion and is therefore large enough to achieve economies of scale. Schroders has decided to implement a scale discount of 2 bps so that these savings are passed onto our retail investors*. The timelines for delivering this are being finalised.

*The retail share classes this discount will be applied to are A and Z.

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Overall conclusion


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Schroder Asian Alpha Plus Fund

The fund aims to provide capital growth in excess of the MSCI AC Asia ex Japan (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of Asian companies, excluding Japan.





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market rates 5 Economies of scaleG A A







*The retail share classes this discount will be applied to are A, Z and L.

We have reviewed the fee rates of funds from Schroder Unit Trusts Limited (SUTL) against the rates of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are between 5 and 20 basis points (i.e. 0.05%-0.20% applied to the value of the assets that we manage for you) higher than either equivalent Schroders-managed non-UK domiciled funds or segregated mandates. We completed a further review to determine the reason behind the difference in fees. Where the differences relate to segregated mandates or institutional holdings in funds we have concluded that charging these clients a fee that is 5 to 20 basis points lower than the fees on this fund is reasonable and appropriate. This reflects the higher levels of longevity (i.e. the longer length of time they invest) that we see from institutional clients. This differential also reflects the higher costs of running funds that are sold through distributors or intermediaries, such as an online platform or a financial adviser. We have therefore concluded that this fund’s fees are reasonable and appropriate.

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Overall conclusion


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Schroder Dynamic Planner Portfolio 3

The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide whilst aiming to maintain the fund’s risk rating classification as set by Distribution Technology (DT). The fund is part of the Schroder Dynamic Planner Portfolio range of funds. The funds seek to achieve a targeted level of risk from ‘1’ which is classified as the lowest risk to ‘10’ which is classified as the highest risk, based on risk ratings provided by DT. The fund has a DT risk rating classification of ‘3’.





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market rates 5 Economies of scaleA G G



Our assessment found that this fund is more expensive than the majority of its peers. We conducted further analysis of our pricing and are now considering the most suitable approach. We will shortly be writing to you to let you know how we propose to proceed.


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Overall conclusion


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The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide, whilst aiming to maintain the fund’s risk rating classification as set by Distribution Technology (DT). The fund is part of the Schroder Dynamic Planner Portfolio range of funds. The funds seek to achieve a targeted level of risk from ‘1’ which is classified as the lowest risk to ‘10’ which is classified as the highest risk, based on risk ratings provided by DT. The fund has a DT risk rating classification of ‘4’.





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Overall conclusion


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Overall conclusion


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The fund aims to provide capital growth and income by investing in equities worldwide, whilst aiming to maintain the fund’s risk rating classification as set by Distribution Technology (DT). The fund is part of the Schroder Dynamic Planner Portfolio range of funds. The funds seek to achieve a targeted level of risk from ‘1’ which is classified as the lowest risk to ‘10’ which is classified as the highest risk, based on risk ratings provided by DT. The fund has a DT risk rating classification of ‘7’.





26




7

6








27










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Fusion Managed Defensive Fund

The fund aims to provide capital growth and income in excess of the Consumer Price Index (CPI) plus 1% per annum (net of fees*) over a market cycle (which is typically 3 to 5 years), whilst also seeking to mitigate the risk of incurring a loss greater than 10% over any investment period, by investing in a diversified range of assets and markets worldwide. The fund will seek to achieve a target average volatility (a measure of how much the fund’s returns may vary over a year) over the market cycle of 4% per annum. This cannot be guaranteed and your capital is at risk.

*Net of fees is after the deduction of the fund’s ongoing charge.





28


Please refer to the fund’s KIID here for performance data as at 31 December 2019.


7

6








29










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Fusion Portfolio 3

The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide with a target average volatility (a measure of how much the fund’s returns may vary over a year) over a rolling five year period of 4% per annum.





30




7

6








31










Overall conclusion


G G G



G

G

G

G

G

G

G







32




7

6








33










Overall conclusion


G G G



G

G

G

G

G

G

G







34




7

6








35










Overall conclusion


G G G



G

G

G

G

G

G

G







36




7

6








37










Overall conclusion


G G G



G

G

G

G

G

G

G


The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide with a target average volatility (a measure of how much the fund’s returns may vary over a year) over a rolling five year period of 12% per annum





38




7

6








39










Overall conclusion




G

G

G

G

G

G

G

Schroder Global Cities Real Estate Income

G G G

The fund aims to provide income and capital growth in excess of inflation (as measured by the UK Consumer Price Index) plus 3% per annum (after fees have been deducted) over a 3 to 5 year period by investing globally in equities of real estate companies worldwide that offer regular dividend payments. This cannot be guaranteed and your capital is at risk.





40




7

6











41










Overall conclusion




G

G

G

G

G

G

G

Schroder Global Cities Real Estate Securities

G G G

The fund aims to provide income and capital growth in excess of inflation (as measured by UK Consumer Price Index) plus 3% per annum (after fees have been deducted) over a 3 to 5 year period by investing in equities of real estate companies worldwide. This cannot be guaranteed and your capital is at risk.





42




7

6











43










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Global Diversified Income Fund

The fund aims to provide income of 3% to 5% per annum and capital growth by investing in equities, bond and alternative assets worldwide. This cannot be guaranteed and your capital is at risk.





44


Please refer to the performance data in the fund’s most recently available KIID here, dated 23 March 2020.


7

6








45










Overall conclusion


G G G



G

G

G

A

G

A

G

Schroder Global Emerging Markets Fund

The fund aims to provide capital growth in excess of the MSCI Emerging Markets (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of emerging market companies worldwide.





46




7

6



market rates 5 Economies of scaleA G A





Our assessment found that this fund is more expensive than the majority of its peers. We conducted further analysis of our pricing as a result. We concluded that the amount we charge is reasonable and appropriate in light of the fund’s investment objective and limited available capacity. We will continue to monitor this on an ongoing basis.


We have reviewed the fee rates of funds from Schroder Unit Trusts Limited against the rates of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are more than 20 basis points (i.e. 0.20% applied to the value of the assets that we manage for you) higher than either comparable non-UK domiciled funds that Schroders manages or segregated mandates. We have completed a further review at the fund and mandate level to understand the differences in the fee rates. We review the appropriateness of our pricing on an ongoing basis. We have reviewed the reasons for these differences in fees which can be a result of a number of factors. These include the services we provide to you and other clients, the costs of providing these services and in many cases the capacity of the fund. We sometimes constrain or limit the capacity of our funds to protect the best interests of those investors already invested in the fund. Where this is the case we have concluded that the differences in prices is reasonable and appropriate as this fund has a limited amount of capacity due to demand.

47










Overall conclusion


G G G



G

G

G

G

G

A

G

Schroder Global Equity Fund

The fund aims to provide capital growth in excess of the MSCI World (Net Total Return) (GBP) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.





48




7

6



market rates 5 Economies of scaleG G A


Our assessment found that this fund is lower-priced than the majority of its peers, and is therefore demonstrating value to our clients by being competitively priced. However, we plan to reduce the cost of this fund through a targeted fee reduction, the OCF for the Z share class will reduce by 30 bps, the L share class will be reduced proportionally.



49










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Global Multi-Factor Equity Fund

The fund aims to achieve capital growth in excess of the MSCI ACWI World (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.





50




7

6








51










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder High Yield Opportunities Fund

The fund aims to provide income and capital growth of between 4.5% and 6.5% per annum (after fees have been deducted) over a 3 to 5 year period by investing in bonds worldwide. This cannot be guaranteed and your capital is at risk.





52




7

6











53










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder India Equity Fund

The fund aims to provide capital growth in excess of the MSCI India (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of Indian companies.





54




7

6








55










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Institutional Pacific Fund

The fund aims to provide capital growth in excess of the MSCI Pacific ex Japan (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities in developed markets of the Asia Pacific region. The fund may also seek to provide income.





56




7

6








57










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Institutional UK Smaller Companies Fund

The fund aims to provide capital growth in excess of the FTSE UK Series Small Cap ex Investment Trusts (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of small-sized UK companies.





58




7

6








59










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Long Dated Corporate Bond Fund

The fund aims to provide capital growth and income in excess of the Bank of America Merrill Lynch 15+ Year Non-Gilt (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in long dated bonds issued by companies worldwide.





60




7

6








61










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder MM Diversity Fund

The fund aims to provide capital growth in excess of the UK Consumer Price Index (after fees have been deducted) over a 5 to 7 year period by investing in a diversified range of assets worldwide. There is no guarantee that this objective will be met and your capital is at risk.


We have assessed whether the fund has delivered its investment objective over the performance period of seven years. Over that time period the fund has delivered on its investment objective. We have concluded that, in terms of performance, the fund is delivering value. For more detail on how we completed this assessment, please refer to the ‘Seven areas’ section in the front of this report.



62




7

6











63










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Monthly Income Fund

The fund aims to provide monthly income equal to 5% per annum by investing in a diversified range of assets and markets worldwide. This cannot be guaranteed and your capital is at risk.





64




7

6




GWe have looked at charges across all of the share and unit classes in this fund. Find your share class in the list below to see whether we have made any changes to your holding:







65










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Multi-Asset Total Return Fund

The fund aims to provide capital growth and income of 3 month GBP LIBOR (or an equivalent reference rate) + 4% per annum (before fees have been deducted*) over rolling three year periods by investing in a diversified range of assets and markets worldwide. The fund also aims to target a volatility (a measure of how much the Fund’s returns may vary) range of 4% - 8% over the same period. This cannot be guaranteed and your capital is at risk.

*For the target return after fees for each unit class please visit the Schroder website https://www.schroders.com/en/uk/private-investor/investing-with-us/historical-ongoing-charges/.





66




7

6








67










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Sterling Broad Market Bond Fund

The fund aims to provide capital growth and income in excess of the benchmark* (after fees have been deducted) over a 3 to 5 year period by investing in a diversified portfolio of bonds worldwide.

* The fund’s benchmark is a composite of 50% of the iBoxx GBP Gilts Total Return and 50% of the iBoxx GBP Non-Gilts (Gross Total Return) index.





68




7

6








69










Overall conclusion


G G G



G

G

G

A

G

A

A

Schroder Sterling Corporate Bond Fund

The fund aims to provide income and capital growth in excess of the Bank of America Merrill Lynch Sterling Corporate & Collateralised (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in bonds issued by UK companies and companies worldwide.





70




7

6




AWe have looked at charges across all of the share and unit classes in our funds. Find your share class in the list below to see whether we have made any changes to your holding:


– If you held A Shares and you invested directly with Schroders, you have already been moved to the Z Share Class and are being charged lower fees as a

result. Controls have been implemented to ensure that retail clients can no longer invest in the A share class.

– If you hold C shares, the fee was reduced to the same level as the clean fee Z retail share class on 01/04/2020.




We have reviewed the fee rates of funds from Schroder Unit Trusts Limited against the rates of other Schroders-managed non-UK domiciled funds. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are more than 20 basis points (i.e. 0.20% applied to the value of the assets that we manage for you) higher than either comparable Schroder managed non-UK domiciled funds or segregated mandates. We have completed a further review at the fund and mandate level to understand the differences in the fee rates. We review the appropriateness of our pricing on an ongoing basis. We have concluded that this price differential is reasonable and appropriate. This is because this strategy forms part of a much larger mandate which is priced differently as the mandate benefits from economies of scale, which lower the operational costs of management. Therefore, it is reasonable to expect a price differential.

71










Overall conclusion


G G G



G

G

G

A

G

G

G

Schroder Strategic Bond Fund

The fund aims to provide income and capital growth of between 2.5% and 4.5% per annum (after fees have been deducted) over a 3 to 5 year period by investing in bonds issued by governments, government agencies, supra-nationals and companies worldwide. This cannot be guaranteed and your capital is at risk.





72




7

6









Our assessment found that this fund is more expensive than the majority of its peers. We conducted further analysis of our pricing as a result. We concluded that these charges are now slightly higher than competitors. We will therefore be reducing the cost of this fund through a targeted fee reduction, the OCF for the Z share class will reduce by 10 bps, the A and L share classes will be reduced proportionally.


73










Overall conclusion


G G G



G

G

G

A

A

G

A

Schroder Strategic Credit Fund

The fund aims to provide income and capital growth in excess of 3 Month GBP LIBOR (or an equivalent reference rate) (after fees have been deducted) over a 3 to 5 year period by investing in bonds of UK and European companies but this cannot be guaranteed and your capital is at risk.





74




7

6



market rates 5 Economies of scaleA A G










75










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder Sustainable Multi-Factor Equity Fund

The fund aims to provide capital growth in excess of the MSCI All Countries World (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.





76




7

6








77










Overall conclusion


G G G



G

G

G

A

G

G

G

Schroder UK Dynamic Absolute Return Fund

The fund aims to achieve an absolute return (after fees have been deducted) by investing in equities of UK companies.Absolute returns means the fund seeks a positive return over rolling 12-month periods in all market conditions, but this cannot be guaranteed and your capital is at risk.





78




7

6




GWe have looked at charges across all of the share and unit classes in our funds.

– If you held P1 Shares and you invested directly with Schroders, you have already been moved to the P2 Share Class and are being charged lower fees as a result.

If you invest in the P1 Share Class but no longer have an adviser, please contact us at [email protected] to discuss your options as we can move you to a cheaper share class.




79










Overall conclusion


G G G



G

G

G

G

G

A

A

Schroder UK Dynamic Smaller Companies Fund

The fund aims to provide capital growth in excess of the FTSE Small Cap ex-Investment Trust (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of small-sized UK companies.





80




7

6



market rates 5 Economies of scaleG G A



– If you held A Shares and you invested directly with Schroders, you have already been moved to the Z Share Class and are being charged lower fees as a

result. Controls have been implemented to ensure that retail clients can no longer invest in the A share class.






81










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder UK Real Estate Fund

The investment objective of the Company is to carry on Property Investment Business and to manage cash raised from investors for investment in the Property Investment Business, with the intention of achieving a blend of income and capital growth. The Company’s target return is to achieve 0.5 per cent per annum (net of all fees and expenses) above the Benchmark over rolling three year periods. The Company will seek to diversify risk by holding a mixed portfolio of retail, office, industrial and other property throughout the UK.





82


Please refer to the fund’s Quarterly Report here for performance data as at 31 December 2019.


7

6







The fund’s assets under management are greater than £1 billion and therefore it is achieving meaningful economies of scale. This fund does not contain any retail share classes as it is only available to institutional investors. These investors are already offered a scale discount in the form of lower management fees or rebates which reflect the longevity of their investment.

83










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder UK Real Estate Fund Feeder Trust

Investment objective The investment objective of the Trust is to achieve a blend of income and capital growth by investing solely in the SREF.





84


Please refer to the fund’s Quarterly Report here for performance data as at 31 December 2019.


7

6








85










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder UK Smaller Companies Fund

The fund aims to provide capital growth in excess of the FTSE UK Series Small Cap ex Investment Trusts (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of small-sized UK companies.





86




7

6











87










Overall conclusion


G G G



G

G

G

G

G

G

G

Schroder US Equity Income Maximiser

The fund aims to provide income by investing in equities of large US companies.The fund aims to deliver an income of 5% per year but this is not guaranteed and could change depending on market conditions.





88




7

6








89










Overall conclusion


G G G



G

G

G

A

A

A

G

Schroder US Mid Cap Fund

The fund aims to provide capital growth and income in excess of Russell 2500 Total Return Lagged (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of medium-sized US companies.





90




7

6



market rates 5 Economies of scaleA A A









91










Overall conclusion


G G G



G

G

G

A

G

A

G

Schroder US Smaller Companies Fund

The fund aims to provide capital growth in excess of Russell 2000 Lagged (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of small-sized US companies.





92




7

6











93








1 Performance

Investment objective

Overall conclusion

3. General costs of authorised manager

A



A

G

G

G

G

A

G

Schroder Absolute Return Bond Fund

The fund aims to provide an absolute return of 3 month LIBOR (or an equivalent reference rate) plus 1% (after fees have been deducted) over rolling 12-month periods by investing directly or indirectly in bonds issued by governments, government agencies and companies worldwide. Absolute returns means the Fund seeks a positive return over rolling 12-month periods in all market conditions, but this cannot be guaranteed and your capital is at risk.


Drivers for underperformanceThe fund has outperformed the target over one year, but underperformed over three and five years. There were two periods of underperformance. In the fourth quarter of 2018, investors turned more cautious and markets moved sharply, becoming out of synch in our view with economic fundamentals which are the basis of how we make investment decisions.

In 2015, the fund was positioned in anticipation that US and UK government yields would rise. However, increasingly cautious investors started to buy government bonds, which are lower risk. This had the effect of pushing yields lower, which worked against us. Positioning for higher inflation and for rising US corporate bond prices was also detrimental to performance.

The portfolio has reduced its return target in response to demand for a product with more consistent performance. The portfolio focuses on delivering this by

investing across a range of different markets and assets, actively shifting between them and varying the levels of exposure. As such the portfolio should not be overly dependent on any single factor or market. Broadly, the competitive landscape includes products which aim for higher returns. These will generally hold a higher level of exposure to individual markets and sectors and have outperformed over recent years.

Actions taken / rationale if noneThere have been no fundamental changes to the investment style since inception and we retain a high level of conviction in our disciplined and active approach to how we construct our portfolio. We have though made one augmentation. Following our annual review of 2015, a standard part of our process, we introduced what we call the Market Roadmap in 2016. This was a response to the fact that markets had become increasingly driven by non-economic, sentiment-based factors, and

we believe this is likely to remain the case. Working alongside our thematic, economic-focused approach, this Market Roadmap gives us a better understanding of these non-economic drivers.

Given the diversified nature of the portfolio, underperformance in periods such as the fourth quarter of 2018, when markets are moving strongly and uniformly in one direction, is not too surprising. As such we have seen no reason to implement any specific measures.

We have confidence in the fund’s investment strategy and in Schroders’ ability to deliver on its investment objective in the future.

94




7

6


Comparable services

4 Comparable market rates

5 Economies of scale

2 Quality of service 3 General costs of

authorised fund manager G

G A

G

G G

We have looked at charges across all of the share and unit classes in our funds. Find your share class in the list below to see whether we have made any changes to your holding:




We have reviewed the fee rates of funds from Schroder Unit Trusts Limited (SUTL) against the rates of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are between 5 and 20 basis points (i.e. 0.05%-0.20% applied to the value of the assets that we manage for you) higher than either equivalent Schroders-managed non-UK domiciled funds or segregated mandates. We completed a further review to determine the reason behind the difference in fees. Where the differences relate to segregated

mandates or institutional holdings in funds we have concluded that charging these clients a fee that is 5 to 20 basis points lower than the fees on this fund is reasonable and appropriate. This reflects the higher levels of longevity (i.e. the longer length of time they invest) that we see from institutional clients. This differential also reflects the higher costs of running funds that are sold through distributors or intermediaries, such as an online platform or a financial adviser. We have therefore concluded that this fund’s fees are reasonable and appropriate.





95








1 Performance


Overall conclusion


R



R

G

G

G

G

G

G

Schroder Advanced Beta Global Equity Small and Mid Cap Fund

The fund seeks to provide capital growth and income in line with the MSCI ACWI World Small Cap (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in the equities of small and mid cap companies worldwide.

Taking into account all seven areas included in the assessment of value, we recognise that the fund is not demonstrating value consistently, particularly in the Performance area. We have completed a further review and shared the outcomes of this review with you below.

Drivers for underperformanceThe fund is only intended to be invested in by Schroders multi-asset investment team and is not marketed externally.

It aims to deliver a return that is in line with the index over a market cycle, defined as a 3 to 5 year period. It aims to deliver on its objective by incorporating a range of investment styles – commonly known as factors – such as “Value”, “Quality”, “Momentum” and “Low Volatility”.

The fund’s underperformance over the reference period can be attributable to the underperformance of our Value and Momentum factors. However, the fund has not reached its full performance period.

Actions taken / rationale if noneIn the light of the fund’s overall performance, we are reviewing the investment strategy and considering what action would be appropriate, acting in the best interests of investors.

96




7

6


Comparable services





G G

G

G G

We have looked at charges across all of the share and unit classes in this fund. Our assessment has concluded that there are no other share or unit classes that serve broadly the same purpose as the one you are currently in, thus we have not made any changes to your holding.






97








1 Performance


Overall conclusion


A



A

G

G

G

G

G

G

Schroder Advanced Beta Global Equity Value Fund

The fund seeks to provide capital growth and income in line with the MSCI ACWI Value (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.


Drivers for underperformanceThe fund is only intended to be invested in by Schroders’ multi-asset investment team and is not marketed externally. The fund aims to deliver a return that is in line with the MSCI ACWI Value index over a market cycle, defined as a 3 to 5 year period. It is important to note that this fund has not reached the upper limit of this period since inception.

The fund is designed to provide exposure to the value style of investing. This means investing in good quality companies that have been overlooked by the market and are trading at a significant discount to their true value. To do this, we use certain measures (or signals) to decide which companies are displaying value. Our favoured signals are a company’s operating cash flow yield and its dividend

yield. An operating cash flow yield is the amount of cash a company is generating each year relative to the total value (both debt and equity) investors have placed on the firm. Meanwhile the dividend yield is the amount of money a company pays shareholders (over the course of a year) divided by its current share price.

Over the long-term these measures have been successful ways of measuring value and have outperformed other measures, but over the reference period they have performed less well.

Actions taken / rationale if noneThe fund has not yet reached the five-year track record specified in the investment objective, that being the time horizon we would use to judge this strategy.

This strategy is designed to provide exposure to the value investment style. Accordingly, the objective of the fund is to deliver a return that is similar to – but not necessarily the same as – the MSCI ACWI Value index as the fund does not fully replicate the index. We would therefore expect that the performance of the fund will fluctuate compared to the index. In light of these considerations we are not making any changes to the strategy at this time.


98




7

6


Comparable services





G G

G

G G







99








1 Performance


Overall conclusion


A



A

G

G

A

G

G

G

Schroder All Maturities Index Linked Bond Fund

The fund aims to provide income and capital growth in excess of the FTSE A Government Securities UK Index Linked All Stocks (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in index-linked bonds issued by the UK government and other governments.


Drivers for underperformanceThe fund has slightly underperformed the benchmark over one, three and five years.

The most significant period of underperformance was at the end of the first quarter of 2019 and at the start of the second quarter of 2019.

At that time the strategy was positioned in anticipation of increasing inflation in the UK, as well as in the US, where we held inflation linked Treasuries, which are not included in the fund’s benchmark. We also positioned the fund in anticipation that UK and US government bond yields would rise, which they did not.

Actions taken / rationale if noneWe retain a high level of conviction in our disciplined and active approach to building our portfolio, so we are

not introducing any specific measures to address any periods of modest underperformance. Under the fund’s guidelines, 80% of the fund’s assets will be invested in index-linked bonds issued by the UK government. This means the fund is likely to be highly correlated with the underlying asset class. However, we continue to diversify risk in the portfolio, in a bid to achieve outperformance, using exposure to inflation-linked bonds that aren’t part of the benchmark, and to conventional bonds.

Increasingly, markets are being driven by investor sentiment rather than economic fundamentals. We are conscious that as a result there is frequently a disconnect between economic fundamentals and market valuations. Our view is that over the long-term fundamentals and valuations realign, even if in the short-term they can go out of synch. Given

this, we strive to have a disciplined approach to how we build our portfolio, by focussing on a range of signals to alert us to opportunities across our investment themes. It might also lead us to take shorter-term tactical positions to exploit these disconnections.

We are reviewing the fund’s investment strategy and considering what action would be appropriate, acting in the best interests of investors. We will shortly be writing to you to let you know how we propose to proceed.

100




7

6


Comparable services




authorised fund manager A

G G

G

G G







101








1 Performance


Overall conclusion


A



A

G

G

G

A

A

G

Schroder Asian Income Fund

The fund aims to provide income and capital growth in excess of the MSCI AC Pacific ex Japan (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of Asia Pacific companies excluding Japan but including Australia and New Zealand.


Drivers for underperformanceOver the last five years, the fund has underperformed in 2017 and 2019. However, these years have dominated the five year numbers and as a result the fund has slightly underperformed its benchmark over this period.

In both 2017 and 2019 the best performers in Asia were shares that offer very low yields (in terms of dividends, which are the payments made to shareholders out of a company’s profits). The best returns came from a relatively small number of shares. Huge companies such as Chinese internet firms Tencent and Alibaba (which each currently make up around 5% of the index) performed very strongly and were significant contributors to the overall benchmark performance.

Their strong performance led investors to also favour other similarly low-yielding companies and this drove up

their prices. These are companies which pay a very low dividend or no dividend at all, and, in our view, are unlikely to grow their future dividends materially in the foreseeable future. Therefore, these companies have not been held in the fund given its emphasis on income. We saw this situation in part reverse in 2018, when the fund outperformed the index as a broader range of companies performed well and higher yielding shares outperformed the lower yielding shares.

The fund’s performance over the period was also affected by a number of underperforming stocks, particularly in China. Not holding Tencent and Aliababa were the biggest negatives at an individual stock level. The other area that affected relative performance was in Hong Kong due to our higher exposure to banks versus insurance companies, as the latter has strongly outperformed in the financials sector.

Actions taken / rationale if noneOur strategy to focus on income has remained consistent and we remain focused on stock picking. We continue to look for good companies where we can see a strong income case and potential for capital growth. We saw the benefits of this in 2018 when a broader group of shares performed well and lower-yielding shares such as the Chinese internet names underperformed. During this period the fund performed well and underlined the importance of remaining consistent with our income investment approach. We think that that the underperformance in 2017 and 2019 is understandable given our focus on income.


102




7

6


Comparable services





A A

G

G G












103








1 Performance


Overall conclusion


A



A

G

G

A

G

G

G

Schroder Asian Income Maximiser

The fund aims to provide income and capital growth by investing in equities of Asian companies, excluding Japan. The fund aims to deliver an income of 7% per year but this is not guaranteed and could change depending on market conditions.


Drivers for underperformanceThe fund aims to deliver capital growth and an income of 7% per year by investing in shares from companies in Asia, excluding Japan.

We have achieved this income objective each year since the fund’s launch in June 2010. Over the past five years, the fund has distributed the following: 7.6% in 2015; 7.5% in 2016; 7.6% in 2017, 7.4% in 2018 and 7.2% in 2019 (all figures for A Inc share classes). We have not however always been able to achieve capital growth.

It’s important to note that we enhance the income provided on the fund by using instruments known as covered call options. It explains why the portfolio is structurally different relative to the comparator benchmarks.

This covered call option strategy involves other financial institutions entering into contracts relating to individual shares we hold. These institutions provide an up-front payment in exchange for any rise in the share price above a certain level over a set period of time. Our fund managers sell these covered call option contracts on a recurring basis, typically for three month periods. The payments from these buyers are distributed to investors and used to help boost the natural annual dividend by around 3.5% to meet the fund’s 7% income target.

As we sacrifice some potential capital growth upside in return for this enhanced income, if share prices are rising, it is likely that the fund will underperform a similar portfolio of shares that does not use a covered call strategy.

The past five years have been an environment in which we would expect the options strategy to weigh on performance given the fast-rising market.

Regarding the underlying portfolio of shares, the main periods of underperformance were 2017 and 2019.

The best returns in both those calendar years came from a relatively small number of shares. Larger companies such as Chinese internet firms Tencent and Alibaba (which each currently make up around 5% of the index) performed very strongly. Not holding these companies was detrimental to fund performance.

Their strong performance led investors also to favour other similarly low-yielding companies and drove up their prices. These are companies which pay a very low dividend (payments made to shareholders out of a company’s profits) or no dividend at all, and, in our view, are unlikely to grow their future dividends materially in the foreseeable future. Therefore, these companies have not been held in the fund given its emphasis on income.

We saw this in part reverse in 2018, when the fund outperformed the index as a broader range of companies performed well and higher yielding shares outperformed.

Actions taken / rationale if noneWe believe performance has been consistent with our investment approach and discipline. Therefore, our strategy has remained consistent and we remain focused on stock picking. We continue to look for good companies where we can see a strong income case and potential for capital growth.

We saw the benefits of this in 2018 when a broader group of shares performed well and lower-yielding shares such as the Chinese internet names underperformed. During this period the fund performed well and underlined the importance of remaining consistent with our income investment approach.

The fund continues to deliver on its income objective and its pattern of returns since its launch is consistent with expectations for the fund in rising market conditions.


104




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G

G G










105








1 Performance


Overall conclusion


A



A

G

G

G

G

A

A

Schroder Core UK Equity Fund

The fund aims to provide capital growth and income in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of UK companies.


Drivers for underperformanceThe fund’s underperformance has been partly due to a number of underperforming stocks, particularly in the financial and consumer goods sectors. These include Barclays (from 2016 onwards), consumer finance firm Provident Financial in 2017 and retirement services specialist Just Group in 2018.

Underlying this has been the fund’s bias to value shares. Value shares are those from companies that we believe are good quality but which have been overlooked by the market and are trading at a significant discount to their true value. This is an investment style that has been out of favour during the period under review, which has instead favoured growth shares. Throughout the period, fund performance has also been affected by our relatively low allocation to expensive growth stocks. These are companies perceived as stable

growers that investors are willing to pay a premium for on the basis of their future growth prospects. We expected them to prove popular among investors due to a backdrop of quantitative easing, low interest rates and low economic growth. However, we have been surprised by the extent to which investors have been willing to pay ever higher valuations for them compared to the past.

It is worth noting that we have seen recent signs of improvement in the fund’s performance and it was ahead of its target benchmark in 2019.

Actions taken / rationale if noneThe key action is the appointment of Matt Bennison to manage the fund. Matt joined the UK equity team in 2015 and was named co-manager of this fund in September 2018. He assumed full responsibility for the fund in April 2019.

We are encouraged by the stabilisation of performance under the new fund manager. There have been improvements in stock selection in 2019, as reflected by the good performance of retailer Pets At Home and Assura, an investor in the primary care property sector.

The fund continues to have a bias towards value shares over the expensive quality growth shares we mentioned above. It is the fund manager’s conviction that the strong performance of the more expensive growth shares is unsustainable and the trend is due to reverse. We cannot know when this will happen, or what the catalyst will be, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant.


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G A

A

G G


– If you are invested in the A Share Class and have ongoing advice, we are not making any change to the charges as these are set up to pay your adviser an annual commission. This share

class is the most cost effective share class we offer with that feature.










107








1 Performance


Overall conclusion


A



A

G

G

G

G

G

G

Schroder Diversified Growth Fund

The fund aims to provide capital growth and income of inflation (as measured by the UK Consumer Price Index) plus 5% per annum (after fees have been deducted) over a 5 to 7 year period by investing in a diversified range of assets and markets worldwide.

This cannot be guaranteed and could change according to prevailing market conditions. Your capital is at risk.


Drivers for underperformanceThe fund has two objectives. One is to produce returns of 5% above inflation, as measured by the UK consumer price index (CPI). The other is for volatility (the fluctuations of performance) to be less than two-thirds that of the global stock market. The timescale we measure this on is five to seven years. Because of these dual objectives, when global shares are returning less than 5% above inflation it becomes inevitable that the fund will have periods when it too will underperform that target. During 2015 and 2018 global stock markets struggled, which directly affected our ability to deliver the fund’s objective.

Performance was also affected by our bias towards value investing over the period. This involves investing in what we believe are good quality companies that have been overlooked by the market and are trading at a significant discount to

their true value. Investors over this period instead favoured so-called quality growth stocks. These are companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. The value style of investing has underperformed the growth style over the period under review as investors have been prepared to pay ever-higher prices for growth stocks.

The fund has met its volatility objective over the full period. Most recently, there has also been an improvement in the fund’s performance and it outperformed its benchmark in 2019.

Actions taken / rationale if noneWe have made a number of enhancements to our process in recent years, while adhering to our core philosophy. It is based on several assumptions regarding how markets behave, but our belief is

that we should base our decisions on valuations, while also taking into account where we are in the economic cycle. We also include other analysis based on various factors such as volatility and potential downside risk. However, certain elements of our investment process approach have evolved over this period, as we have taken advantage of our ability to conduct more sophisticated quantitative analysis and sought to improve implementation of portfolio decisions.

We have also recently taken action to enhance our stock selection process, allowing us more effective control over our exposure to investment styles.


108


Please refer to the performance data in the fund’s most recently available KIID here, dated 24 March 2020.


7

6


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G G

G

G G




The fund’s assets under management are greater than £1 billion and therefore it is achieving meaningful economies of scale. This fund does not contain any retail share classes as it is only available to institutional investors. These investors are already offered a scale discount in the form of lower management fees or rebates which reflect the longevity of their investment.



109








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Overall conclusion


A



A

G

G

G

G

G

G

Schroder Dynamic Multi Asset Fund

The fund aims to provide capital growth and income of inflation (as measured by the UK Consumer Price Index) plus 4% per annum (after fees have been deducted) over a 5 to 7 year period by investing in a diversified range of assets and markets worldwide.

This cannot be guaranteed and could change according to prevailing market conditions. Your capital is at risk.


Drivers for underperformanceThe fund has two objectives. One is to produce returns of 4% above inflation, as measured by the UK consumer price index (CPI). The other is for volatility (the fluctuations of performance) to be less than two-thirds that of the global stock market. The timescale we measure this on is five to seven years. Because of these dual objectives, when global shares are returning less than 4% above inflation it becomes inevitable that the fund will have periods when it too will underperform that target. During 2015 and 2018 global stock markets struggled, which directly affected our ability to deliver the fund’s objective.

Performance was also affected by our bias towards value investing over the period. This involves investing in good quality companies that we think have been overlooked by the market and are trading at a significant discount to their true value. Investors over this period

instead favoured so-called quality growth stocks. These are companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. The value style of investing has underperformed the growth style over the period under review as investors have been prepared to pay ever-higher prices for growth stocks.

Most recently, there has also been an improvement in the fund’s performance and it outperformed its benchmark in 2019, as it was positioned in expectation of a market recovery following the falls of 2018.

The fund has met its volatility objective over the period.

Actions taken / rationale if noneWe have made a number of enhancements to our process in recent years, while adhering to our core philosophy. It is

based on several assumptions regarding how markets behave, but our belief is that we should base our decisions on valuations, while also taking into account where we are in the economic cycle. We also include other analysis based on various factors such as volatility and potential downside risk. However, certain elements of our investment process approach have evolved over this period, as we have taken advantage of our ability to conduct more sophisticated quantitative analysis and sought to improve implementation of portfolio decisions.

We have also recently taken action to enhance our stock selection process, allowing us more effective control over our exposure to investment styles.


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G

G G










111








1 Performance


Overall conclusion


A



A

G

G

G

G

G

A

Schroder European Alpha Income Fund

The fund aims to provide income and capital growth in excess of the FTSE World Europe ex UK (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of European companies, excluding the UK.


Drivers for underperformanceThe fund has experienced a challenging period of performance, most notably from June 2018 to September 2019.

The second half of 2018 saw a number of individual stocks detract considerably from relative returns. A number of these stocks were contrarian calls. When these stocks performed poorly, we underperformed the benchmark. These stocks included engineering firm Altran Technologies, oil and gas industry contractor Borr Drilling, Danske Bank and pharmaceutical firm Bayer. We remained holders of Altran and Borr Drilling, we sold Danske and Bayer.

While stock selection affected performance in the second half of 2018, the underperformance of the portfolio in the first eight months of 2019 was primarily driven by the bias of the fund. During this period, the European market showed a marked preference for companies perceived to have stable earnings and cash flows. These included consumer staples businesses such as Nestle, where there can be a belief that their earnings are more robust than other types of businesses in the event of an economic downturn. Our view was that the valuations of these businesses were unsustainable

and therefore we had a significant underweight to consumer staples. With these shares then outperforming strongly, our relative performance suffered significantly as a result.

No action was taken with regards to this positioning and our large underweight to this sector has been maintained as we feel client capital would be at greater risk of being permanently lost by being invested in companies valued at well above historic norms. We expect these valuations will revert back to longer term averages in time. The driver of returns for many of these businesses was multiple expansion (investors being happier to pay increasingly more for the same amount of company earnings) rather than increasing profits, which we feel is unsustainable. However, while these shares continued to perform exceptionally well, our relative performance suffered significantly.

In the fourth quarter of 2019, the positioning pressures receded somewhat and the fund performed strongly.

Actions taken / rationale if noneNo action has been taken to change the investment process or approach significantly following this

period of underperformance. We still believe that the current investment process is suitable to generate long term outperformance for clients.

The fund still owns a number of the holdings that weighed on returns. In some cases so far, this decision has been a positive one as selling would have crystallised losses before shares began to outperform. Our conviction in a number of these individual names remains strong, after checking and re-checking that the original investment thesis is still intact. The portfolio offers exposure to a very different set of companies in Europe, providing well-needed diversification for a balanced equity portfolio.

In March 2020, James Sym resigned from Schroders, with Martin Skanberg taking his place. Martin has a strong track record of investing in European equities over two decades, and his Schroder European Fund is currently gold-rated by the rating agency Morningstar.


112




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G G












113








1 Performance


Overall conclusion


A



A

G

G

G

G

A

G

Schroder European Alpha Plus Fund

The fund aims to provide capital growth in excess of the FTSE World Series Europe ex UK (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of European companies, excluding the UK.


Drivers for underperformanceThe fund has experienced a challenging period of performance, most notably from June 2018 to September 2019. This 16-month period of performance can be broken in to two distinct sub-periods where underperformance was driven by two separate factors: initially stock selection, and latterly the portfolio’s positioning.

The second half of 2018 saw a number of individual stocks detract considerably from relative returns. A number of these stocks were contrarian calls that were either not held at all by peers or they held much smaller positions. When these stocks performed poorly, we underperformed the peer group and the benchmark. These stocks included oil and gas industry contractor Borr Drilling, Aurelius Equity Opportunities (a subsidiary of asset manager Aurelius), IT consultancy Sopra Steria and Danske Bank. We remained holders of the first three names as we still felt the underlying investment case stood up. We sold Danske in January 2019 as we believed the ongoing money-laundering scandal and associated ongoing operation challenges would pose a persistent challenge for future performance.

While stock selection negatively affected performance in the second half of 2018, the underperformance of the portfolio in the first eight months of 2019 was primarily driven by the bias of the fund. During this period, the European market showed a marked preference for companies perceived to have stable earnings and cash flows. These included consumer staples businesses such as Nestle, where there can be a belief that their earnings are more robust than other types of businesses in the event of an economic downturn. Our view was that the valuations of these businesses were unsustainable and therefore we had a significant underweight to consumer staples. With these shares then outperforming strongly, our relative performance suffered significantly as a result.

No action was taken with regards to this positioning and our large underweight to this sector has been maintained as we felt client capital would be at greater risk of being permanently lost by being invested in companies valued at well above historic norms. We expect these valuations will revert back to longer-term averages in time. The driver of returns for so many of

these businesses tended to be multiple expansion (investors being happier to pay increasingly more for the same amount of company earnings) rather than an increase in profits, which we feel is unsustainable.

In the fourth quarter of 2019, the positioning pressures receded somewhat. It was pleasing to see the fund perform better as optimism grew regarding global trade prospects.

Actions taken / rationale if noneNo action was taken to change the investment process or approach significantly following this period of underperformance as we still felt the investment process was suitable to generate long term outperformance for clients.

In March 2020, James Sym resigned from Schroders with Hannah Piper taking his place. Hannah has been part of the wider Schroder European Equities team since 2012, and has managed Schroder ISF Italian Equity since 2015.


114




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G

G G











115








1 Performance


Overall conclusion


R



R

G

G

A

G

G

G

Schroder European Equity Absolute Return Fund

The fund aims to achieve an absolute return (after fees have been deducted) by investing in equities of European companies.

Absolute return means the fund seeks to provide a positive return over rolling 12-month periods in all market conditions, but this cannot be guaranteed and your capital is at risk.


Drivers for underperformanceThe fund has been managed by two different teams over the period: Steve Cordell (start of period-March 2018) and Bill Casey and Nick Kissack (March 2018-present). Steve followed a so-called Business Cycle approach; this means identifying stock opportunities based on the current stage of the economic cycle. There are four stages of the economic cycle: expansion, slowdown, recession and recovery. Depending on the phase, the share price performance of different types of companies will react in different ways, and this influenced how Steve built his portfolio.

The fund’s target is to produce a positive absolute return, not to outperform a benchmark.

The fund has under-performed since the end of 2015. Following the 2008-2009 global financial crisis, central banks around the world kept interest rates low. This had

the effect of keeping the business cycle in an expansion phase for longer than is usual. This in turn created a challenging environment for investment strategies that aim to take advantage of turning points in the business cycle. In particular, the exposure to the travel & leisure and financials sectors detracted most notably from fund performance over the period.

In 2018 Bill Casey and Nick Kissack took over the management of the fund. The European equity market dropped over 10% during 2018. Although the fund delivered a negative return, it did not suffer as steep a fall as the market. However, 2019 was a more challenging year. The market enjoyed substantial gains but these were largely due to shares known as bond proxies or expensive growth. These are stocks that operate in sectors such as consumer staples or utilities that have predictable returns and attractive dividends. The fund managers view this group of stocks as being expensively

valued. The fund therefore had short positions in a group of these companies over the period (i.e. these were sold in expectation of poor performance). They were the largest drag on performance as their share prices continued to gain even as expectations for their earnings were downgraded. This apparent mismatch between valuation and fundamental factors such as earnings was the main driver of underperformance during 2019.

Actions taken / rationale if noneIn the light of the fund’s overall performance, we are reviewing the investment strategy and considering what action would be appropriate, acting in the best interests of investors. We will shortly be writing to you to let you know how we propose to proceed.

116




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G G

G

G G

We have looked at charges across all of the share and unit classes in our funds.

– If you held P1 Shares and you invested directly with Schroders, you have already been moved to the P2 Share Class and are being charged lower fees as a result.

If you invest in the P1 Share Class but no longer have an adviser, please contact us at [email protected] to discuss your options as we can move you to a cheaper share class.



The fund you invest in is not large enough (defined as fund assets under management greater than £1 billion) to realise economies of scale. Therefore it does not benefit from meaningful cost savings achieved from size. However, as it may be able to attain them as it grows, we will continue to assess this and will notify you if the position changes.



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1 Performance


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A



A

G

G

G

A

G

G

Schroder European Fund

The fund aims to provide capital growth in excess of the FTSE World Series Europe ex UK (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of European companies, excluding the UK.


Drivers for underperformanceThe fund experienced a tough period of performance lasting from September 2018 to June 2019. During this period, the best returns in the market came from a relatively narrow group of shares. These were typically companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive.

The fund’s performance therefore suffered from our relatively low allocation to these expensive growth shares. At the same time, the market also tended to favour larger companies over medium-sized firms, adding to the challenging environment for the fund.

The fund’s performance over the period was also affected by a number of underperforming stocks, particularly some medium sized companies that are

sensitive to the economic cycle. These included German engineering firm ThyssenKrupp, German food processing technology specialist GEA Group and German lighting manufacturer Osram Licht. In some cases, such as French-listed Eramet, we exited positions where the original case for investing in the stock was no longer there. Since June 2019, fund performance has improved. The recovery has been primarily due to stock-specific factors, with some of the underperformers from earlier in the year also rebounding. The fund also benefited from the market partially moving away from expensive growth stocks, and towards value. Value stocks are those we think are overlooked by the market and are trading at a significant discount to their true value.

Actions taken / rationale if noneThe fund still holds many of the stocks that adversely affected performance because we believe that the investment case for

these stocks remains strong. The team performed a significant amount of due diligence on the poor performers in the early part of 2019. We remain of the view that these companies will benefit from self-help initiatives and can become larger, more profitable businesses in the future.

In addition, we believe that the fund holds the right group of companies to provide a portfolio focused on stock-specific risk, with no permanent tilt towards any particular investment style.


118




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G

G G











119








1 Performance


Overall conclusion


A



A

G

G

A

G

G

A

Schroder European Recovery Fund

The fund aims to provide capital growth by investing in equities of European companies, excluding the UK.


Drivers for underperformanceSince a change in fund manager took place in May 2018, the fund is now managed in a value style. This means seeking out good quality companies that we believe have been overlooked by the market and are trading at a significant discount to their true value.

In broad terms, stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of shares. These have typically been growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive as investors have been willing to pay even more for them than in the past.

The prevailing environment has echoes of the long build-up to the dotcom bubble in 2000. Investors’ eagerness to own growth shares at this point in the cycle is evidence of a classic behavioural bias where investors think that what is performing well now must continue to perform well in the future. In this sort of market environment it is not unusual for our value style to underperform.

Their have been a small number of stock specific issues in the portfolio over the past five years, but no more than is typical. An example of a stock that detracted from returns is asset manager GAM Holding. This is a position we initiated in late 2018, seeing a value opportunity in the wake of misconduct charges and the liquidation of a number of the firm’s bond funds. Over 2019 GAM has continued to revamp and simplify its business and so we remain comfortable retaining this stock. Mining company South32 has also underperformed. Miners in general have come under pressure amid lower commodity prices and worries over slowing demand from China.

Actions taken / rationale if noneWe place significant emphasis on detailed valuation and accounting analysis, particularly balance sheet strength. Through fundamental research and by looking beyond the short-term market ‘noise’ and behavioural biases, we believe we can identify companies that trade at a substantial discount to their fair or intrinsic value.

This structured and in-depth research on individual companies makes our process robust and repeatable. However, there is

no way of knowing how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, we expect this volatility also to be the source of the team’s long-term performance.

European data shows that growth shares have tended to trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The ‘elastic band’ relationship between value and growth is extremely stretched. As and when the market snaps back to its typical function as an arbiter of value, history suggests that value will then significantly outperform growth.

During this current period of underperformance we have re-examined all of the positions in the fund, reviewed fund turnover and assessed the consistency of our style bias. It is our firm belief that we hold a basket of companies with an attractive risk/reward profile, and that those clients who choose to stay the course may be well-rewarded for their patience.


120




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121








1 Performance


Overall conclusion


R



R

G

G

A

G

G

G

Schroder European Smaller Companies Fund

The fund aims to provide capital growth in excess of the Euromoney Smaller Europe ex UK (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of small-sized European companies, excluding the UK.


Drivers for underperformanceThe fund underperformed in 2018 and the first half of 2019. Its performance did improve in the latter part of 2019 as market fears relating to the strength of the European economy calmed and bond markets reverted to more normal behaviour.

Prior to this, we witnessed extreme behaviour in both European stock and bond markets. This created an environment where shares were in demand because they looked attractive compared to other assets. However, at the same time, worries over recession meant there was little demand for shares from companies that are more sensitive to the economic cycle. This led the market to prefer certain types of stocks: those perceived to be lower risk, to be less reliant on a growing economy, and larger companies as opposed to smaller ones. This created extreme divergence in share

price performance and valuations.

The fund had a bias towards the smaller end of its small company investment universe (i.e. the range of stocks in which it can invest). This undermined performance at a time when size mattered, even within the smaller company area.

The fund also had a bias towards companies that perform better when the economy is growing. They underperformed when the global trade environment declined rapidly.

Actions taken / rationale if noneWe have taken a number of remedial actions. We have sold investments where the rationale for investing was significantly challenged or our conviction in the business had fallen. We also adjusted our sector positioning to reinforce our primary focus on long-term economic, demographic and technological trends. These measures are designed to

concentrate the fund around the core strategy and the team’s expertise. The size of positions we hold has also been adjusted in some cases as we have re-evaluated their risks. It is important to highlight that the core positions and strategy of the fund remain consistent.

Smaller companies tend to be more risky investments than larger ones, and we have been through a period with highly unusual market characteristics with Europe experiencing rapid economic change. The fund’s core strategy is to invest in companies with strong business models, in attractive industry segments, and with exposure to long term growth opportunities. We remain firmly of the view that this strategy should make for positive portfolio performance in the future.


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A

G

G

G

G

G

G

Schroder Flexible Retirement Fund

The fund aims to provide capital growth over the medium to long term by investing globally in shares, bonds and alternative assets. The fund seeks to provide investors with a total return of Consumer Price Index (CPI) + 2% (before fees have been deducted) per annum over a 3 to 5 year period whilst also seeking to mitigate the risk of incurring a loss greater than 8% over any investment period. There is no guarantee that this objective will be met. There is a risk to an investor’s capital. Unitholders may not get back the amount originally invested.


Drivers for underperformanceThe fund has two objectives: to deliver a return of 2% above the consumer price index (CPI, a measure of inflation), and also not lose more than 8% over any holding period.

In the prevailing market environment, where interest rates are at extremely low – or even negative levels – it has not been possible to meet both objectives. To deliver 2% above CPI would have required a much greater exposure to stock markets. It would also have meant that the second objective may not have been met, given the downside risk that stock markets pose.

As this is a conservative fund for investors who are willing to sacrifice some gains in order to avoid losses,

it would not be appropriate to take a non-conservative approach.

It is important to note this fund has not reached the upper limit of its recommended performance period.

Actions taken / rationale if noneThe fund has not yet reached the five-year track record specified in the investment objective, being the time horizon we use to judge this strategy.

We need to retain our conservative approach while acknowledging that the market environment has changed since the fund was launched. It has not been possible to outperform inflation without taking on an unacceptable degree of risk. We do not see this scenario changing.

In the light however of the fund’s underperformance we have decided to change the fund’s objectives so that we can continue to meet the expectations of our conservative investors. The new objective will be to outperform the risk-free interest rate by 2%, rather than CPI. We will be writing to you shortly with more information on this.

We have confidence in the fund’s investment strategy and in Schroders’ ability to deliver on its amended investment objective in the future.

124


Please refer to the performance data in the fund’s most recently available KIID here, dated 19 February 2020.


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G G

G

G G







125








1 Performance


Overall conclusion


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A

G

G

G

G

A

G

Schroder Gilt & Fixed Interest Fund

The fund aims to provide income and capital growth in excess of the FTSE Gilts All Stocks index (after fees have been deducted) over a 3 to 5 year period by investing in bonds issued by governments worldwide.


Drivers for underperformanceThe fund has slightly underperformed FTSE Gilts All Stocks over one, three and five years.

Over three years, there has been no notable single source of underperformance. The most significant period of underperformance was the fourth quarter of 2018, when investment sentiment suddenly saw a sharply negative shift. This resulted in a disconnection, in our view, between actual economic conditions and market levels.

Actions taken / rationale if noneWe retain conviction in our disciplined and active investment approach and are satisfied that our approach has meant any periods of underperformance have been relatively modest. We therefore don’t see a need for significant changes.

As per the guidelines, 80% of the portfolio is invested in UK government bonds, so the performance of these bonds will have a material influence on the fund’s returns. We can, however, actively manage duration (the sensitivity of bond prices to moves in yields or interest rates). So while bond prices and yields will move inversely, we can benefit whether yields rise or fall.

The fund can also actively decide whether to invest more in bonds with a longer life span or vice versa, known as yield curve positioning, depending on the UK’s economic prospects among other things. The fund can allocate to non-government bonds, such as those issued by companies, which can carry slightly more risk, but therefore may provide higher returns. It can also invest in non-UK assets, though we will hedge or mitigate any potential loss or gain from converting other currencies back to sterling.

The portfolio’s positioning reflects the broader views and themes of the Global Multi-Sector team. Following the team’s 2016 annual review of its investment process, we introduced the Market Roadmap, aiming to address the fact that markets have become increasingly driven by non-economic, sentiment-based factors, and we believe this is likely to remain the case. Working alongside our thematic, economic-focused approach, this Market Roadmap gives us a better understanding of these non-economic drivers and informs our investment decisions.


126




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127








1 Performance


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A

G

G

A

G

A

G

Schroder Global Equity Income Fund

The fund aims to provide income and capital growth in excess of the MSCI World (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.


Drivers for underperformanceThe fund is managed in a value style. This means seeking out good quality companies that have been overlooked by the market and are trading at a significant discount to their true value.


The prevailing environment has echoes of the long build-up to the dotcom bubble in 2000. Investors’ eagerness to own growth shares at this point in the cycle is evidence of a classic behavioural bias where investors think that what is performing well now must continue to perform well in the future. In this sort of market environment it is not unusual for our value style to underperform by comparison.

The fund’s performance over the period was also affected by a number

of underperforming stocks, including energy company Centrica. However, as long term investors we are prepared at times to wait for companies to recover, believing that this will ultimately be reflected in a higher share price.

Another poor performer was US for-profit education provider Apollo Education. When we bought our holding, we felt that Apollo’s financial prospects were significantly better than the market believed, and the group had a robust financial position. By selling the company at a depressed valuation, Apollo’s board did not allow time for this upside to emerge.


This structured and in-depth research on individual companies makes our process robust and repeatable. The main downside to our investment approach

is that we cannot know how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

Global data shows that growth shares have tended to trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The ‘elastic band’ relationship between value and growth is extremely stretched. As and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.

During this period of underperformance we have re-examined all of the positions in the fund, reviewed fund turnover and assessed the consistency of our style bias. It is our firm belief that we hold a basket of companies with an attractive risk/reward profile, and that those clients who choose to stay the course may be well-rewarded for their patience.


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G

G G











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A

G

G

G

G

G

G

Schroder Global Healthcare Fund

The fund aims to provide capital growth by investing in equities of healthcare and medical related companies worldwide.


Drivers for underperformanceWhat proved to be a weak period of stock selection in 2017 was the main cause of the fund’s underperformance over the five-year period.

During that year the topic of US healthcare reform was in the political and media spotlight, which significantly affected investor sentiment towards the sector. Rather than company fundamentals, share prices were driven by media headlines and the pronouncements of politicians. This had a significant effect on the performance of companies in the sector.

A small number of stocks we held in the portfolio had a disproportionately negative impact on the performance of the fund, such as pharmaceutical firms Celgene,

Allergen and Teva. This was due to specific events that affected those companies. The fund’s returns relative to the benchmark were also affected by not holding some of the best performing stocks in the sector during the period, such as medical device businesses Intuitive Surgical and Align Technology. We considered both companies to be overly expensive.

Actions taken / rationale if noneWe have taken a careful look at our investment process and decided that no action is necessary in response to the fund’s underperformance over the period.

Although the fund has failed to outperform the benchmark, we believe this can be put down in large part to

the unusual market environment and significant impact of sentiment.

Despite a weak 2017 for stock selection due largely to big price moves in individual stocks, stock selection over the past five years has in aggregate had a positive impact on fund performance.

We had strong investment theses underpinning our investments, even in companies that performed disappointingly. The fund manager has paid close attention to the risk profile of the portfolio and maintained an appropriate level of diversification throughout.


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G

G G










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A

G

G

A

G

G

G

Schroder Global Recovery Fund

The fund aims to provide capital growth by investing in the equities of companies worldwide which are considered to be undervalued relative to their long term earnings potential.





The fund’s performance over the period was also affected by a number of underperforming stocks, including US for-profit education provider Apollo

Education. When we bought our holding, we felt that Apollo’s financial prospects were significantly better than the market believed, and that the group had a robust financial position. However the decision by the board of Apollo to take the company private when its valuation was depressed meant that the fund was unable to benefit from the upside that we believe would have otherwise followed.

Actions taken / rationale if noneThe fund has not yet reached the five-year track record specified in the investment objective, that being the time horizon we use to judge the strategy.

We place significant emphasis on detailed valuation and accounting analysis, particularly balance sheet strength. Through fundamental research and by looking beyond the short-term market ‘noise’ and behavioural biases, we believe we can identify companies that trade at a substantial discount to their fair or intrinsic value.

This structured and in-depth research on individual companies makes our process robust and repeatable. The main downside to our investment approach is that we cannot know how long the market will take to recognise the value in a company. Returns can therefore

be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

Global data shows that growth shares have tended to trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The ‘elastic band’ relationship between value and growth is extremely stretched. As and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.

During this period of underperformance we have re-examined all of the positions in the fund, reviewed fund turnover and assessed the consistency of our style bias. It is our firm belief that we hold a basket of companies with an attractive risk / reward profile, and that those clients who choose to stay the course may be well-rewarded for their patience.


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G G

G

G G







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A



A

G

G

A

A

A

G

Schroder Income Fund

The fund aims to provide income and capital growth in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of UK companies.



In broad terms, stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of shares. These have typically been growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive.


While the fund has performed well in absolute terms, relative performance has been disappointing. The nature of the fund, which holds a relatively concentrated number of holdings and which does not have a target or

constraining benchmark, means that it is prone to periods of underperformance.

Value investing has displayed a consistent pattern of mean reversion over more than 140 years; this means that shares return to their long-term average levels. We cannot know when this will happen, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant.

The fund’s performance over the period was also affected by a number of underperforming stocks, including energy company Centrica. However, as long term investors we are prepared at times to wait for companies to recover, believing that this will ultimately be reflected in a higher share price.


This structured and in-depth research on individual companies makes our process robust and repeatable. However,

we can never know how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

In the UK, the data shows that growth shares trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The ‘elastic band’ relationship between value and growth is extremely stretched, and as and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.

During this period of underperformance we have re-examined all of the positions in the fund, reviewed fund turnover and assessed the consistency of our style bias. It is our firm belief that we hold a basket of companies with attractive risk/reward profiles, and that those clients who choose to stay the course may be well-rewarded for their patience.


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We have reviewed the fee rates of funds from Schroder Unit Trusts Limited against the rates of other non-UK domiciled funds that Schroders manages. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are more than 20 basis points (i.e. 0.20% applied to the value of the assets that we manage for you) higher than either comparable non-UK domiciled funds that Schroders manages or segregated mandates. We have completed a further review at the fund and mandate level to understand the differences in the fee rates. We review

the appropriateness of our pricing on an ongoing basis. We have reviewed the reasons for these differences in fees which can be a result of a number of factors. These include the services we provide to you and other clients, the costs of providing these services and in many cases the capacity of the fund. We sometimes constrain or limit the capacity of our funds to protect the best interests of those investors already invested in the fund. Where this is the case we have concluded that the differences in prices is reasonable and appropriate as this fund has a limited amount of capacity due to demand.






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A



A

G

G

A

A

A

G

Schroder Income Maximiser

The fund aims to provide income and capital growth by investing in equity and equity-related securities of UK companies. The fund aims to deliver an income of 7% per year but this is not guaranteed and could change depending on market conditions.


Drivers for underperformanceThe fund aims to deliver capital growth and an income of 7% per year by investing in shares from companies in the UK.

We have achieved this income objective each year since the fund’s launch in 2005. Over the past five years, the fund has distributed the following: 7.3% in 2015; 7.2% in 2016; 7.5% in 2017, 7.4% in 2018 and 7.8% in 2019 (all figures for A Inc share classes; the fund’s yield target is measured over the 12 months to 30 November each year). We have not however always been able to achieve capital growth.

It’s important to note that we enhance the income provided on the fund by using instruments known as covered call options. It explains why the portfolio is structurally different relative to the comparator benchmarks.

This covered call option strategy involves other financial institutions entering into contracts relating to individual shares we hold. These institutions provide an up-front payment in exchange for any rise in the share price above a certain level over a set period of time. Our fund managers sell these covered call option contracts on a recurring basis, typically for three month periods. The payments from these buyers are distributed to investors and used to help boost the

natural annual dividend by around 3.5% to meet the fund’s 7% income target.

As we sacrifice some potential capital growth upside in return for this enhanced income, if share prices are rising, it is likely that the fund will underperform a similar portfolio of shares that does not use a covered call option strategy. The past five years have been an environment in which we would expect the options strategy to weigh on performance given the fast rising market.

Looking at the underlying portfolio of shares, it’s important to note that the fund is always managed in a value style. This means seeking out good quality companies that have been overlooked by the market and are trading at a significant discount to their true value.

The best returns over the past five years have typically come from growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive. During this time the value style of investing has typically underperformed.

The fund’s performance over the period was also affected by a number of underperforming stocks. These included energy company Centrica.


In the UK, the data shows that growth shares trade at a significant premium to value shares. The ‘elastic band’ relationship between value and growth is extremely stretched, and as and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.



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A

G

G

G

A

G

G

Schroder Managed Balanced Fund

The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide.


Drivers for underperformanceThis is a fund that invests in a selection of other Schroders funds. The fund’s performance over the period was affected by the underperformance of some of those funds.

UK shares form a large part of the benchmark and as such Schroder Income Fund and Schroder UK Alpha Plus Fund are key holdings of ours. Both have underperformed over three and five years. Schroder Income Fund outperformed in 2016 and 2018, underperformed in 2015 and 2019 and was flat in 2017. Schroder UK Alpha Plus Fund has been closer to the benchmark but after outperforming in 2015, has undershot its target each year since. Another holding that underperformed its respective benchmark was Schroder ISF US Large Cap.

In addition, several of the component funds, namely Schroder Income, Schroder QEP Global Active Value and Schroder European Fund, are focussed on value shares. These are shares from good quality companies that appear to be overlooked by the market and trading at a significant discount to their true value.

This has been a key driver of underperformance as value investing is an investment style that has been out of favour during the period under review.

Instead, the best returns have come from growth companies, where investors are willing to pay a premium on the basis of their future growth prospects.

On the positive side, our exposure to corporate bonds has been effective, with Schroder All Maturities Corporate Bond and Schroder ISF Global Corporate Bond both outperforming their respective benchmarks across the period. Also, we have had a lower than average exposure to UK shares over the period, which has also had a positive contribution. However, a lower than average exposure to emerging market shares had a slightly negative effect.

The fund’s relative performance has improved over the last two years, primarily because of actions described below to reduce the fund’s focus on value stocks.

Actions taken / rationale if noneWe sought to make the fund’s portfolio more diversified and offset any biases towards any particular stock types, such as value.

As we mention above, the Schroder Income Fund’s focus on value has caused it to underperform. However, it remains a fund that is valued by clients and we believe that the value investment style will come back into favour. We cannot be certain when this will happen, or what the catalyst

will be, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant. If we were to switch strategy now we would risk missing out on this reversal.

We did however, reduce the allocation in 2018 and have introduced the Schroder Prime UK Equity Fund which has proved to be a positive addition. The fund’s robust stock selection process identifies stable companies which we believe are best prepared to prosper at this phase of the economic cycle.

We reduced the allocations to Schroder UK Alpha Plus and Schroder European Fund. We have however increased the allocation to Schroder ISF Global Equity, which focuses on stocks that exhibit above-average growth and helps to balance the portfolio’s exposure to different investment styles.

Similarly, we’ve added a new position in Schroder ISF Global Disruption, which further diversifies the fund’s global equity exposure. In the US large company area, one of the most challenging markets for an active manager, we have reduced the allocation to Schroder ISF US Large Cap.


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R



R

G

G

A

G

G

G

Schroder MM Diversity Balanced Fund

The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide.


Drivers for underperformanceOver the past seven years the fund has underperformed its peer group, the IA Mixed Investment 40-85% sector.

This has primarily been due to two factors. Firstly, our below average exposure to bond markets and, secondly, a relatively low exposure to US shares. Both of these stances were driven by the belief that valuations looked to be relatively high. At the same time, there has been the unusual situation where stock markets and bond markets have been moving in tandem. This has reduced the ability of bonds to protect fund performance should stock markets suffer.

Within stock markets, the US has been an area of intense investor focus, driving valuations to ever more expensive levels. We feel it would be misguided simply to ignore valuations and buy into expensive areas just because they have done well in recent times. That said, our absence in this space has resulted in missing out on strong positive returns.

Regarding our exposure to bonds (also known as fixed income), we kept our exposure levels relatively low through most of the period under review. This decision again came down to our belief that we were presented

with an unfavourable valuation and risk versus reward profile. That is, the upside potential seemed limited whilst the downside was potentially great. However, bond yields have continued to fall. Prices of bonds rise as bond yields fall, so this has led to missed returns.

Also, compared to our peers we had a higher exposure to alternative investments, particularly defensively-positioned hedge funds. This also detracted from performance over the period. This allocation provides an important hedge to risk we are taking elsewhere in the portfolio and provides real diversification, as these strategies do not move in tandem with the broader stock or bond markets. We believe these strategies can perform well if, as we now expect, we enter a period of market turbulence.

It is worthwhile noting that during more recent periods of market turbulence the fund has performed well relative to the peer group. For example, in the final quarter of 2018, when markets suffered heavy losses.

Actions taken / rationale if noneThe team remains comfortable that the current portfolio offers an interesting risk reward profile for investors.

In particular, we think the alternative holdings mentioned above provide an important element of protection as we saw in the fourth quarter of 2018. We think this protection is important given that stock markets have been hitting record highs and may be susceptible to significant turbulence.

Indeed, volatility is showing signs of returning, and the team firmly believes that the portfolio is set up to perform well versus both the peer group and benchmark.

In the past year we have been increasingly adding to our investment in areas where we see undervaluation and therefore opportunity, such as in UK shares and in alternative investments. However, we believe that to make wholesale changes now would not be in the interest of investors.


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G

G G










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R



R

G

G

G

G

G

G

Schroder MM Diversity Income Fund

The fund aims to provide capital growth in excess of the UK Consumer Price Index (after fees have been deducted) and income of 4% per annum over a 5 to 7 year period by investing in a diversified range of assets and markets worldwide. This cannot be guaranteed and your capital is at risk.


Drivers for underperformanceOver the past seven years the fund has comfortably achieved its investment objective which is to outperform the UK consumer price index (CPI).

However, the fund has a target yield of 4%, which it is currently narrowly missing. This is in part due to the meagre yields on offer in financial markets currently, with interest rates across developed markets at or near record lows. But it’s also because we are unwilling to take what we believe would need to be inappropriate levels of risk in an attempt to chase and deliver on this target. That is to say that in many areas of both equities and bonds we see unfavourable valuations and risk versus reward profiles.


In particular, we think the fund’s exposure to ‘alternative investments’, particularly defensively-positioned hedge funds, provide an important element of protection. This was reflected in the fourth quarter of 2018 when the fund performed relatively well during a volatile period. We think this protection is important given that stock markets have been hitting record highs and may be susceptible to significant turbulence.

Indeed, volatility is showing signs of returning, and the team firmly believes that the portfolio is set up to perform well versus the benchmark. We believe that to make wholesale changes now would not be in the interest of investors.


142


Please refer to the performance data in the fund’s most recently available KIID here, dated 11 October 2019.


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G

G G










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R

G

G

G

G

G

G

Schroder MM Diversity Tactical Fund

The fund aims to provide capital growth by investing in a diversified range of assets and markets worldwide.


Drivers for underperformanceOver the past seven years the fund has underperformed its peer group, the IA Flexible Investment sector.

This has primarily been due to two factors. Firstly, our below average exposure to bond markets and, secondly, a relatively low exposure to US shares. Both of these stances were driven by the belief that valuations looked to be relatively high. At the same time, there has been the unusual situation where stock markets and bond markets have been moving in tandem. This has reduced the ability of bonds to protect fund performance should stock markets suffer.

Within stock markets, the US has been an area of intense investor focus, driving valuations to ever more expensive levels. We feel it would be misguided simply to ignore valuations and buy into expensive areas just because they have done well in recent times. That said, our absence in this space has resulted in missing out on strong positive returns.

Regarding our exposure to bonds (also known as fixed income), we kept our exposure levels relatively low through most of the period under review. This decision again came down to our belief that we were presented

with an unfavourable valuations and risk versus reward profile. That is, the upside potential seemed limited whilst the downside was potentially great. However, bond yields have continued to fall. Prices of bonds rise as bond yields fall, so this has led to missed returns.

Also, compared to our peers we had a higher exposure to alternative investments, particularly defensively-positioned hedge funds. This also detracted from performance over the period. This allocation provides an important hedge to risk we are taking elsewhere in the portfolio and provides real diversification, as these strategies do not move in tandem with the broader stock or bond markets. We believe these strategies can perform well if, as we now expect, we enter a period of market turbulence.

It is worthwhile noting that during more recent periods of market turbulence the fund has performed well relative to the peer group. For example, in the final quarter of 2018, when markets suffered heavy losses.


In particular, we think the alternative holdings mentioned above provide an important element of protection as we saw in the fourth quarter of 2018. We think this protection is important given that stock markets have been hitting record highs and may be susceptible to significant turbulence.

Indeed, volatility is showing signs of returning, and the team firmly believes that the portfolio is set up to perform well versus both the peer group and benchmark.

In the past year we have been increasingly adding to our investment in areas where we see undervaluation and therefore opportunity, such as in UK shares and in alternative investments. However, we believe that to make wholesale changes now would not be in the interest of investors.


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A



A

G

G

A

G

G

G

Schroder MM International Fund

The fund aims to provide capital growth in excess of the FTSE All World ex UK (Gross Total Return) index (after fees have been deducted) over a 5 to 7 year period by investing in equities of companies worldwide.


Drivers for underperformanceSince the global financial crisis of 2008, stock markets have performed very well for the most part. However, the best returns have come from a relatively small number of companies, particularly the so-called quality growth stocks. These are companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. They have performed particularly well over the past three to five years.

The trend has been particularly notable in the US, where the popularity of such companies has driven their share prices up to ever more expensive levels.

We have held a significantly lower than average exposure to both quality growth and the US. This is because we feel it would be misguided to simply ignore valuations and buy into expensive areas just because they have done well in recent times.

Meanwhile, there are large parts of stock market that have significantly underperformed. Much of this group can be classified as value. These are good quality companies that appear to be trading at a significant discount to their true value. The value style of investing has been discarded by many investors following a prolonged period of relative underperformance.

While we participated in much of the quality growth returns over the period under review, we began building a value bias into the fund’s portfolio which was fully in place by the start of 2019. We did this on the basis that under-valuations had begun to look much more attractive.

Through 2019 the divergence of growth versus value stretched further as economic and political headlines saw investors continue to chase the perceived safety of recent strong performers. The persistence of this trend only serves to increase the

opportunity for the fund to benefit from its current value bias in the future.

Actions taken / rationale if noneThe team remains comfortable that the current portfolio offers an interesting risk reward profile for investors. We feel the outperformance of growth over value is overdone and due to reverse. Market volatility is showing signs of returning, and we believe there is potential for a sharp turnaround in favour of value versus growth and non-US markets versus the US market. If we were to change strategy now we would risk missing out on this reversal.


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G G










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R



R

G

G

A

G

G

G

Schroder MM UK Growth Fund

The fund aims to provide capital growth in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 5 to 7 year period by investing in equities of UK companies.


Drivers for underperformanceSince the global financial crisis of 2008, stock markets have performed well for the most part. However, the best returns have come from a relatively small number of companies, particularly the so-called quality growth stocks. These are companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. They have performed particularly well over the past three to five years. The popularity of such companies has driven their share prices up to ever more expensive levels. Most recently, this has continued to occur despite corporate profits in many of these areas turning down.

Meanwhile, there are large parts of the stock market that have significantly underperformed. Much of this group can be classified as value. These are good quality companies that appear to be trading at a significant discount to their true value. The value style of investing has been discarded by many investors following a prolonged period of relative underperformance.

We participated in much of the quality growth returns until around 2017. We then began building a value bias into the fund’s portfolio on the basis that some under-valuations had begun to look extreme and therefore increasingly attractive.

2017 was a particularly challenging period for the fund’s performance, as the concentration of investors’ capital into quality growth accelerated, and the growing divergence with value became more and more exaggerated. However, whilst unexpected at the time, the persistence of this trend only serves to increase the opportunity for the fund to benefit from its current value bias in the future.

More recently, the divergence of growth versus value stretched further as economic and political headlines saw investors continue to chase the perceived safety of recent winners. This hampered the fund’s relative returns.

To summarise the portfolio, we are positioned to benefit from two market environments. The first is a broad market sell-off, the second is a relative

outperformance of value versus growth. Both outcomes occurring concurrently would result in especially strong relative performance.

It is worthwhile noting that during more recent periods of market turbulence, such as in 2018, the fund has performed relatively well due to our more contrarian approach.

We are aware that we can never know exactly when our clients may invest with us. As such, we spend a significant amount of our time aiming to ensure that the fund is set up to provide a steady return stream over time relative to the index.

Actions taken / rationale if noneIn the light of the fund’s overall performance, we are reviewing the investment strategy and considering what action would be appropriate, acting in the best interests of investors. We will shortly be writing to you to let you know how we propose to proceed.

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A



A

G

G

G

G

A

G

Schroder Moorgate I Fund

The fund aims to provide income and capital growth in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in UK equities.



Broadly, the stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of shares. These have typically been growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive as investors have been willing to pay even more for them than in the past.

The prevailing environment has echoes of the long build-up to the dotcom bubble in 2000. Investors’ eagerness to own growth shares at this point in the cycle is evidence of a classic behavioural bias where investors think that what is performing well now must continue to perform well in the future. In this sort of market environment it is not unusual for our value style to underperform by comparison.

While the fund has performed well in absolute terms, relative performance has been disappointing. The nature of the fund, which holds a relatively concentrated number of holdings

and which does not have a target or constraining benchmark, means that it is prone to periods of underperformance.

Value investing has displayed a consistent pattern of mean reversion over more than 140 years; this means that shares tend to return to their long-term average levels. We cannot know when this will happen, or what the catalyst will be, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant.

The fund’s performance over the period was also affected by a number of underperforming stocks, including energy company Centrica. However, as long term investors we are prepared to wait for the company to recover, and believe this will ultimately be reflected in a higher share price.

Actions taken / rationale if noneWhen we assess companies, we place significant emphasis on detailed valuation and accounting analysis, particularly balance sheet strength. Through fundamental research and by looking beyond the short-term market ‘noise’ and behavioural biases, we believe we can identify companies that trade at a substantial discount to their fair or intrinsic value.

This structured and in-depth research on

individual companies makes our process robust and repeatable. A downside to our investment approach is that we don’t tend to know how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

In the UK, the data shows that growth shares often trade at a significant premium to value shares and in recent years some of the most expensive stocks have become even more expensive. The ‘elastic band’ relationship between value and growth is extremely stretched, and as and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.



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G A

G

G G








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A



A

G

G

G

G

A

G

Schroder Prime UK Equity Fund



Drivers for underperformanceThe fund’s performance over the period was affected by a number of underperforming stocks. These included telecoms group BT, broadcaster ITV and energy supply group Centrica. In addition, the fund’s focus on larger companies has also held back returns as mid-sized companies have significantly outperformed. Reassuringly, performance has recovered over the last few years driven by factors unique to the companies concerned. Examples of these successes include financial technology business NEX Group, specialist retailer Pets At Home and pest control specialist Rentokil Initial.

Actions taken / rationale if noneOver the last year the fund’s underperformance relative to its benchmark has not been significant.


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A



A

G

G

A

A

G

G

Schroder QEP Global Active Value Fund

The fund aims to provide capital growth and income by investing in equities of companies worldwide.


Drivers for underperformanceThis fund invests in global shares which we believe offer an attractive value profile. Value investing involves seeking out good quality companies that are overlooked by the market and are trading at a significant discount to their true value.

The measures of value which we look at in a company are cash flows, dividends, earnings and the company’s assets. When selecting holdings for the fund, we also maintain an awareness of quality measures, such as profitability, stability, financial strength and governance.

2019 proved a challenging environment for our investment approach as value stocks have been outperformed by growth stocks. In short, investors have been willing to pay a premium for growth and neglected cheaper opportunities elsewhere regardless of their underlying quality. In addition, certain companies perceived as defensive (holding up well in difficult economic times) have also been popular. Investors’ attention has focused particularly on a small group of growth stocks within the US technology and communications sectors, which have become even larger components of the benchmark and increasingly expensive. Examples include Facebook, Apple, Netflix, Google, Microsoft and Amazon. Given that our focus is on valuations, we have not held these companies in the fund as

we considered them to be overvalued.

With a narrow group of shares leading the market returns, simultaneously a broad range of value stocks have been neglected. This includes areas where the fund is overweight versus the index such as financials and industrial shares. These have suffered from investors’ concerns about the prospects for global growth.

Actions taken / rationale if noneWe maintain full conviction in the QEP investment process and philosophy which have been in place since the fund’s inception.

Although we cannot know precisely when it will happen, we would argue investors’ expectations for certain very popular shares will become more realistic. We believe that this will also lead to a turnaround for value stocks and that growth stocks will become less highly valued.

Potential catalysts for this include these growth stocks announcing disappointing earnings or the threat of greater regulation (a possibility for technology stocks in particular). A prolonged stock market downturn could also lead to investors selling the most popular, liquid and expensive shares.

A return to a market where performance is more broadly-spread, would be regarded

as a much more favourable backdrop for the QEP investment process.

Actions taken have included increasing the fund’s focus on companies which we believe have strong balance sheets, the financial strength to pay their dividends and stable earnings. Meanwhile, we have avoided certain economically-sensitive shares for which valuations appear high given our view of their prospects.

We continue to focus our research on advancing the integration of sustainability considerations into the process. Although short-term comparisons may not be an indicator of the future, the evidence over the past five years suggests that this integration improves returns.

More broadly, we have refined our model of companies’ financial strength so the fund is positioned as well as possible in the event of a deeper-than-expected downturn in economic activity.

The key principles of maintaining diversification and identifying attractively valued companies with solid fundamentals within our investment process has not altered. As a result, our conviction in the holdings in our fund has actually increased.


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Our assessment found that this fund is more expensive than the majority of its peers. We conducted further analysis of our pricing as a result. We will reduce the cost of this fund through a targeted fee reduction; the OCF for the Z share class will reduce by 10 bps, and the A share class will be reduced proportionally.





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A

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G

G

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Schroder QEP Global Core Fund

The fund aims to provide capital growth and income in excess of MSCI World (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies worldwide.


Drivers for underperformanceThis fund invests in shares offering an attractive combination of both value and quality characteristics. The measures of value we look for in a company include cash flows, dividends, earnings and the company’s assets. Quality characteristics, meanwhile, would include profitability, stability, financial strength and governance.

This fund has a 20-year track record. Although the long run performance of the fund has been strong, the recent market environment has proved more challenging for our approach. The best returns have come from a relatively small number of growth stocks for which investors have been willing to pay a premium based on their future growth prospects. Certain companies which are perceived to be defensive (holding up well in difficult economic times) have also been in demand. At the same time, a broad range of stocks, including many high quality ones, have been neglected despite the fact that the underlying fundamentals of these less expensive stocks are generally sound. Given the value-orientated nature of our approach, this environment has proved to be a headwind to the fund’s performance in the recent past, but particularly during 2017 and 2019.

Investors’ attention has focused on a small group of growth stocks within the

US technology and communications sectors. These shares have become even larger components of the reference index and increasingly expensive. Examples include Facebook, Apple, Netflix, Google, Microsoft and Amazon. Given that valuation is a primary consideration in stock selection, the fund has not generally owned these companies.

Actions taken / rationale if noneWe maintain our conviction in the QEP investment process and philosophy which have been in place since the fund’s inception.

Although we cannot know precisely when this will happen, we think that investors’ expectations for certain very popular shares will become more realistic. We see potential catalysts for this, such as the most popular stocks announcing disappointing earnings or the threat of greater regulation (a possibility for technology stocks in particular). A prolonged stock market downturn could also lead to investors selling the most popular, liquid and expensive shares.

Actions taken within the fund have included increasing the focus on stocks with strong balance sheets, the financial strength to pay their dividends as well as stability in earnings. Meanwhile, we have avoided certain economically-sensitive shares for which valuations appear high given their prospects.

We continue to focus our research on advancing the integration of sustainability considerations into the process. Although short-term comparisons may not be an indicator of the future, the evidence over the past five years suggests that this integration improves returns. Our research here has involved adding new data sources to our assessment of the ESG (environment, sustainability and governance) risks that a company faces. We have also used machine learning tools to identify and model these at the stock level while expanding our assessment of accounting ‘red flags’, part of our governance model. More broadly, we have refined our model of companies’ financial strength so as to ensure that the fund is as well-positioned as possible in the event of a deeper than expected downturn in economic activity.

The key principles of maintaining diversification and identifying attractively valued companies with solid fundamentals within our investment process have not altered.

As a result, our conviction in the holdings in our fund has actually increased. We have confidence in the fund’s investment strategy and in Schroders’ ability to deliver on its investment objective in the future.

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Schroder QEP Global Emerging Markets Fund

The fund aims to provide capital growth by investing in equities of companies in emerging market countries.


Drivers for underperformanceThe QEP Emerging Markets strategy is invested in stocks which we believe offer an attractive combination of both value and quality characteristics without reference to the composition of the index. The measures of value which we look at in a company are cash flows, dividends, earnings and the company’s assets. The measures of quality are profitability, stability, financial strength and governance within emerging markets (EM).

As has been the case in developed markets, the main headwind to the performance of the QEP EM strategy over the past year has been the strong performance of a small number of growth stocks, for which investors have been willing to pay a premium on the basis of these companies’ future growth prospects. Often referred to as the BANTS (Baidu, Alibaba, Naspers, Tencent and Samsung), these stocks were already large components in the index which has become even more concentrated than it was previously. Given our focus on valuations and diversification, the strategy tends not to own these stocks to the same size as the index.

On a sector basis the most significant contributors to fund underperformance over the past five years by some margin

have been the consumer discretionary, technology and communications sectors, most notably in China, Korea and South Africa. Once again, this reflects the dominance of a few very large stocks in those sectors that have performed strongly in which the fund is underweight (e.g. Tencent, Samsung and TSMC) due to its diversified approach and focus on valuations.

Actions taken / rationale if noneWe maintain our conviction in the QEP investment process and philosophy which have been in place since the fund’s inception.

Although we cannot know precisely when this will happen, we think that investor demand for expensive higher growth stocks will start to fall away. Potential catalysts for this include these stocks announcing disappointing earnings or the threat of greater regulation. A prolonged stock market downturn could also lead to investors selling the most popular, liquid and expensive shares.

A return to a market where performance is more broadly-spread, would be regarded as a much more favourable backdrop for the QEP process.

Actions taken have included increasing the fund’s focus on companies which

we believe have strong balance sheets, the financial strength to pay their dividends and stability in earnings. Meanwhile, we have avoided certain economically-sensitive shares for which valuations appear high given our view of their prospects.

We continue to focus our research on advancing the integration of sustainability considerations into the QEP process. Although short-term comparisons may not be an indicator of the future, the evidence over the past five years suggests that this integration improves returns.

More broadly, we have refined our model of companies’ financial strength so the fund is positioned as well as possible in the event of a deeper-than-expected downturn in economic activity.

The key principles of maintaining diversification and identifying attractively valued companies with solid fundamentals within our investment process has not altered. As a result, our conviction in the holdings in our fund has actually increased.


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A

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Schroder QEP US Core Fund

The fund aims to provide capital growth in excess of Standard & Poor’s 500 (Net Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies in the United States and Canada.


Drivers for underperformanceThis fund invests in US shares which we believe offer an attractive combination of value and quality characteristics.

While the longer-term performance of the fund has been positive, the recent market environment has proved challenging to our approach.

Amid an economic backdrop of low growth and low interest rates, the best returns have come from a relatively small number of shares, and these have typically been growth companies. Investors have been willing to pay a premium on the basis of these companies’ future growth prospects. Investors’ attention has focused particularly on a small group of growth stocks within the technology and communications sector, which have become larger and larger components of the benchmark index and increasingly expensive. Examples include Facebook, Netflix, Google, Microsoft and Amazon. Given that our focus is on valuations, we have not held these companies in the fund as we considered them to be overvalued.

Our value-orientated investment approach has proved an impediment to performance over the period. Value investing involves seeking out good quality companies that are overlooked by the market and are trading at a significant discount to their true

value. Value has underperformed growth in every major region over the past five years, but particularly within the US market. This is despite the fact that the underlying business fundamentals of these inexpensive companies are generally sound.

Actions taken / rationale if noneWe maintain our conviction in the QEP investment process and philosophy which have been in place since the fund’s inception and have delivered strong returns over the longer term.

Although we cannot know precisely when it will happen, we think investors’ expectations for certain very popular shares will become more realistic. We believe that this will also lead to a turnaround for value stocks and that growth stocks will become less highly valued.

We see potential catalysts for this such as the most popular growth stocks announcing disappointing earnings or the threat of greater regulation (a possibility for technology stocks in particular). A prolonged market downturn could also lead to investors selling out of the most popular, liquid and expensive shares.

A return to a market where performance is more broadly-spread, would be regarded as a much more favourable backdrop for the QEP investment process

Actions taken have included increasing the fund’s focus on companies which we believe have strong balance sheets, the financial strength to pay their dividends and stable earnings. Meanwhile, we have avoided certain economically-sensitive shares for which valuations appear high given our view of their prospects.

We continue to focus our research on advancing the integration of sustainability considerations into the process. Although short-term comparisons may not be an indicator of the future, the evidence over the past five years suggests that this integration improves returns.

We have also refined our model of companies’ financial strength so the fund is positioned as well as possible in the event of a deeper-than-expected downturn in economic activity.

The key principles of maintaining diversification and identifying attractively valued companies with solid fundamentals within our investment process has not altered. As a result, the conviction in the holdings in our fund has actually increased.


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A

G

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G

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A

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Schroder Recovery Fund

The fund aims to provide capital growth by investing in equities of UK companies that have suffered a severe setback in either share price or profitability.


Drivers for underperformance

The fund is managed in a value style. This means seeking out good quality companies that have been overlooked by the market and are trading at a significant discount to their true value.

Broadly speaking, stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of shares. These have typically been growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive.


While the fund has performed well in absolute terms, it is undeniable that relative performance has been disappointing. The nature of the fund, which holds a relatively concentrated number of holdings and which does not have a target or constraining benchmark, means that the fund will always go through periods of underperformance.

Value investing has displayed a consistent pattern of mean reversion over more than 140 years; this means that shares return to their long-term average levels. We cannot know when this will happen, or what the catalyst will be, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant.

The fund’s performance over the period was also affected by a number of underperforming stocks. These included energy company Centrica, which in hindsight we bought too early. However, as long term investors we are prepared to wait for the company to recover, and believe this will ultimately be reflected in a higher share price. Another underperforming stock pick was Debenhams, whose balance sheet deteriorated and we sold the position because of the risk of insolvency.

Actions taken / rationale if none


This structured and in-depth research on individual companies makes our process

robust and repeatable. However, we can never know how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

In the UK, the data shows that growth shares trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The elastic band between value and growth is extremely stretched, and as and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.



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Schroder Responsible Value UK Equity Fund

The fund aims to provide capital growth and income in excess of the FTSE Customised All-Share ex Ethically Screened (Gross Total Return) index* (after fees have been deducted) over a 3 to 5 year period by investing in equities of UK companies.

* The fund’s benchmark is adjusted to exclude companies that do not meet the Responsible Investment Policy.


Drivers for underperformance

The fund is always managed in a value style. This means seeking out good quality companies that have been overlooked by the market and are trading at a significant discount to their true value.

Broadly speaking, stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of shares. These have typically been growth companies, where investors are willing to pay a premium on the basis of their future growth prospects. The popularity of these shares has caused them to become ever more expensive as investors have been willing to pay even more for them than in the past.


While the fund has performed well in absolute terms, it is undeniable that relative performance has been disappointing. The nature of the fund, which holds a relatively concentrated number of holdings and pays little heed to the make-up of any

benchmark, means that it will always go through periods of underperformance.

Value investing has displayed a consistent pattern of mean reversion over more than 140 years; this means that shares return to their long-term average levels. We cannot know when this will happen, or what the catalyst will be, but, given the scale of value’s underperformance, we believe that the potential for a turnaround is significant.

The fund’s performance over the period was also affected by a number of underperforming stocks. These included energy company Centrica, which in hindsight we bought too early. However, as long term investors we are prepared to wait for the company to recover, and believe this will ultimately be reflected in a higher share price.

Actions taken / rationale if none


This structured and in-depth research on individual companies makes our process robust and repeatable. The main downside

to the our investment approach is that we never know how long the market will take to recognise the value in a company. Returns can therefore be volatile over short time periods; however, this volatility is also the source of the team’s long-term performance.

In the UK, the data shows that growth shares trade at a significant premium to value shares and in recent years the most expensive stocks have become even more expensive. The elastic band between value and growth is extremely stretched, and as and when the market snaps back to its typical function as an arbiter of value, history suggests the outperformance of value is likely to be profound.

During this period of underperformance we have re-examined all of the positions in the fund, reviewed fund turnover and assessed the consistency of our style bias. It is our firm belief that we hold a basket of companies with attractive risk/reward profile, and that those clients who choose to stay the course may be well-rewarded for their patience.


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Schroder Small Cap Discovery Fund

The fund aims to provide capital growth in excess of its benchmark* (after fees have been deducted) over a 3 to 5 year period by investing in equities of Asian smaller companies (excluding Japan) and in global emerging market smaller companies.

* The fund’s benchmark is a blend of the MSCI Small Cap (Net Total Return) indices (Emerging Markets, Hong Kong, Singapore).


Drivers for underperformanceThe fund’s performance over the period was affected by its bias towards growth companies. These are companies that investors are willing to pay a premium for on the basis of their future growth prospects. The alternative style of investing is value, which means investing in companies perceived as trading at a discount to their true value.

Over the past five years the Emerging Small Cap Value index has outperformed the Emerging Small Cap Growth index by around 3.2% per annum. So, against the broader benchmark the fund uses, which incorporates both investment styles, the fund’s bias to growth has affected relative

returns. However, the past 12 months have seen growth outperform value and this has been a period where the fund has also outperformed the benchmark.

The fund also has a bias towards Asian markets with less exposure to Latin American markets such as Brazil. This has been a headwind to the fund’s relative performance as Latin America has strongly outperformed emerging Asian markets over the last five years.

Actions taken / rationale if noneSince the fund was launched in 2012, it has significantly outperformed the benchmark. However, it has very slightly underperformed during the

performance period. Given the fund’s unconstrained and unique nature, we expected its performance at times to vary substantially from the index. Hence we do not believe any changes in the process or strategy are necessary.


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This fund is part of the Investment Association’s specialist sector and therefore has no peer group that we can compare the fund’s charges against.




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Schroder Tokyo Fund

The fund aims to provide capital growth in excess of the Tokyo Stock Exchange 1st Section (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of Japanese companies.


Drivers for underperformanceThe fund has underperformed its benchmark over five years, but it is the past three years’ performance that has been the cause. The reason for this is the style of investing we use on the fund. Specifically, the fund has always had a slight bias towards the value style of investing. This involves buying stocks that appear to be trading at a significant discount to their true value. Historically this is an approach that has worked well in the Japanese stock market. However, in recent years, with interest rates at or near zero, this style has fallen out of favour as investors have headed instead for stocks that are perceived to offer stable growth. In addition, they have been willing to pay a premium for them.

At the same time, there has been less dispersion between the returns of different stocks within the same sector. This means that returns from the best performing company in a sector such as utilities, for example, may not be as

different from the worst performing company as it would normally be. This means that stock selection has been less important than in the past, and instead investment style has come to the fore.

This is reflected when we look at worst performing holdings in the fund over three years, where there are no significant outliers. The three year underperformance has been generated by minor negative contributions across a wide range of stocks, supporting our view that the relative underperformance of value stocks has been the dominant influence over the period.

Actions taken / rationale if noneGiven that valuations in the market now range from very undervalued to highly overvalued, we believe there is no incentive to change the fund’s investment style because of the value opportunities available.

There was a change of fund manager in 2019 following the

retirement of Andrew Rose. The new manager is Masaki Taketsume.

We are ensuring that the fund is exposed to stocks where we see specific reasons to think their prices will recover in the future. And we are moving away from some long-held positions that we feel could become value traps, which is when a stock looks cheap but its price never significantly recovers.

We think the current market environment suggests we have scope to increase further our stock specific risk. We are therefore ensuring that the fund fully reflects our level of conviction regarding individual ideas, driven by our in-house fundamental research. As a consequence, this is continuing the trend towards a gradual reduction in the total number of positions in the fund, which has been underway for more than 12 months.


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A

Schroder UK Alpha Income Fund

The fund aims to provide income and capital growth in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of UK companies.


Drivers for underperformanceThe fund had a bias towards the value style of investing over the period. This involves buying what we believe are good quality companies that have been overlooked by the market and are trading at a significant discount to their true value. Specifically, our positions in value stocks like consumer finance firm Provident Financial, retailer M&S and telecoms firm Vodafone affected relative performance. At the same time, we did not benefit from the strong performance of higher-valued stocks like AstraZenaca and Unilever as our exposure to these companies was lower than the benchmark. These so-called quality growth companies are perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects, but are not held by the fund due its value bias.

The fund’s performance over the period was also affected by a number of underperforming stocks in the industrials sector, specifically the outsourcing firm Capita from 2016 onwards, and engineering firm Weir in 2018, as both companies had profit setbacks.

Actions taken / rationale if noneThe fund manager Matt Hudson left Schroders in February 2020 and was replaced by the new managers Sue Noffke and Matt Bennison. They will apply the successful investment approach that they currently use on Schroder Income Growth Fund plc, an investment trust.

The fund has been managed via a so-called Business Cycle approach; this means identifying stock opportunities on a top-down basis which focuses on

the current stage of economic cycle. There are four stages of the economic cycle: expansion, slowdown, recession and recovery. Depending on the phase, the share price performance of different types of companies will react in different ways, and this has influenced how the portfolio has been built.

The new managers are adopting a less fettered approach to stock selection which focuses on a bottom-up, balanced stock picking approach to generating income.


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Schroder UK Alpha Plus Fund



Drivers for underperformanceThe fund’s performance over the period was affected by a number of underperforming holdings. These included energy supply group Centrica (from 2017 onwards), Royal Bank of Scotland (in 2015 and 2016) and electricity generation firm Drax (in 2015, 2017 and 2019). Some of our holdings in smaller companies such as IT firm Redcentric (in 2016) and video games specialist GAME Digital (in 2015) also underperformed.

At the same time, we did not benefit from the strong performance of higher-valued stocks like AstraZeneca and Unilever as our exposure to these companies was lower than the benchmark.

Actions taken / rationale if nonePhilip Matthews was replaced as fund manager in 2018. Performance has shown signs of stabilisation under his replacements Bill Casey and Nick Kissack, although it remains lower than the FTSE All-Share Index since their appointment.

One significant change the new managers have made is to apply a more concentrated approach to stock selection and so to reduce the number of stocks the fund holds.


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We have reviewed the fee rates of funds from Schroder Unit Trusts Limited against the rates of other Schroders-managed non-UK domiciled funds. We also compared them against funds run exclusively for individual clients (known as segregated mandates) that use the same investment strategy. This fund has fee rates that are more than 20 basis points (i.e. 0.20% applied to the value of the assets that we manage for you) higher than either comparable Schroder managed non-UK domiciled funds or segregated mandates. We have completed a further review at the fund and mandate level to understand the differences in the fee rates. We review the appropriateness

of our pricing on an ongoing basis. We have concluded that this price differential is reasonable and appropriate. This is because this strategy forms part of a much larger mandate which is priced differently as the mandate benefits from economies of scale, which lower the operational costs of management. Therefore, it is reasonable to expect a price differential.





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Schroder UK Equity Fund

The fund aims to provide capital growth and income in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of UK companies.


Drivers for underperformanceIn broad terms, stock markets have performed well over the past five years. However, the best returns have come from a relatively small number of companies, particularly the so-called quality growth stocks. These are companies perceived as stable growers that investors are willing to pay a premium for on the basis of their future growth prospects. They have performed particularly well over the past three to five years. The popularity of these shares has caused them to become ever more expensive.

We have been unwilling to pay the ever increasing premium for these companies. Instead, we have favoured shares that we think are overlooked by the market and

are trading at a significant discount to their true value. Against this backdrop, however, holdings in lowly valued financials (including Royal Bank of Scotland and Barclays), insurers and food retailers have nevertheless held back fund performance.

The periods of underperformance occurring from 2017 have been due to a number of factors such as profit setbacks at certain companies (for example energy supply group Centrica and security company G4S) and a tough backdrop for the aforementioned banks. In a similar vein, underexposure to selected quality growth stocks (such as beverages group Diageo and household goods manufacturer Unilever) have also held back performance.

Actions taken / rationale if noneThe fund’s performance improved towards the end of 2019 due to the good performance of a number of stocks. These included defence technology business QinetiQ, specialist financial broker TP ICAP, defence group Chemring and infrastructure specialist Balfour Beatty.

As active investors, we continue to focus on these lowly valued areas where we feel there is potential for positive change in the years ahead. The primary performance drivers for most of our holdings are unique to the companies concerned.


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A

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Schroder UK Mid 250 Fund

The fund aims to provide long term capital growth in excess of the FTSE 250 ex Investment Trusts (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies listed in the FTSE 250 ex Investment Trusts.


Drivers for underperformanceThe fund’s performance over the period was affected by a number of underperforming stocks. These included travel group Thomas Cook, van and commercial vehicle hire company Northgate, motor retailer Pendragon and Lamprell, which provides services to the oil and gas industry.

In term of sectors, our stock selection in the consumer services sector was

a notable area of underperformance, while a lower than benchmark exposure to the technology sector also negatively affected performance.

Actions taken / rationale if noneWe believe the fund’s holdings are fundamentally strong, including Northgate, Pendragon, domestic utility supplier Telecom Plus and financial services specialist International Personal Finance.

The last quarter of 2019 was encouraging as the removal of political uncertainty after the UK election result saw investor sentiment in the UK markedly improve. Over this period the UK stock market as a whole did well and the fund noticeably outperformed its benchmark.


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of our pricing on an ongoing basis. We have concluded that this price differential is reasonable and appropriate. This reflects the higher levels of longevity (i.e. the longer length of time they invest) that we see from institutional clients. This differential also reflects the higher costs of running funds that are sold through distributors or intermediaries, such as an online platform or a financial adviser. We have therefore concluded that this fund’s fees are reasonable and appropriate.






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R

G

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Schroder UK Opportunities Fund

The fund aims to achieve capital growth and income in excess of the FTSE All Share (Gross Total Return) index (after fees have been deducted) over a 3 to 5 year period by investing in equities of companies in the UK.


Drivers for underperformanceThe fund’s performance over the period was affected by a number of underperforming holdings in small and mid-sized companies. These included travel group Thomas Cook, digital marketing firm XL Media, and retailer Dixons Carphone, all three of which suffered profit setbacks. The fund’s performance was also held back by British American Tobacco, which was affected by regulatory pressures. On a sector basis, our stock selection in the technology and consumer services sectors had a particularly negative effect on performance.

The fund has followed a business cycle approach which has been its core philosophy for well over a decade. The period of time in which an economy

moves from a state of expansion to one of contraction (before expanding again) is known as the business cycle. Business cycle funds change their style of investing depending on the stage of the economy. The approach followed in recent years has favoured stocks that generally fall within the value rather than growth style of investing. The value style of investing has on the whole not performed well over this period. However, the fund outperformed over the entire expansion phase of the current business cycle between 2009 and 2019.

Actions taken / rationale if noneThere has been a recent change in the management of the fund. The fund transferred in December 2019 to a new portfolio manager, Alex Breese.

Alex took over from Matt Hudson, who left the business in February 2020.

Alex joined Schroders in July 2013 and his approach is centred on identifying out of favour or misunderstood companies where there is scope for positive change. The manager expects to profit from these situations as positive change is realised.


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Glossary of Terms for Assessment of Value reports Absolute return

This is an asset’s standalone return (gain or loss) over time. It is not being compared to anything else such as a benchmark or another asset.

All-in fee

The all in fee provides investors with a single number for how much they are paying Schroders to manage their fund. This all in fee replaces all the components that have historically made up the costs of a fund, which includes the annual management charge (AMC), the administration charge and other operating costs.

Asset class

Investments are divided up into groups that contain similar types of assets. The main investment asset classes are equities (also known as shares or stocks), bonds and cash. Non-traditional asset classes are known as alternative investments.

AMC (annual management charge)

This is the yearly fee an investment manager charges to manage a fund. It is generally a percentage of the assets of the fund, for example 0.6% of the fund’s assets per annum. The AMC is automatically deducted from the assets of the fund.

Authorised Fund Manager

The authorised fund manager (AFM) is responsible for the overall management of the fund, investing money on behalf of clients. An authorised investment fund is one that is authorised and regulated by the UK financial regulator, the FCA. Please also see Financial Conduct Authority entry.

Benchmark

A benchmark is typically an index or a market average against which an investment fund’s performance is measured.

Bond

A bond is a way for governments and companies (the issuers of the bond) to borrow money for a certain amount of time. A typical arrangement would be in exchange for an upfront payment from an investor, the issuer will make periodic interest payments to the investor and then repay the initial investment amount at the end of the bond’s term (its maturity).

Business cycle

The business cycle is also referred to as the “economic cycle”. Essentially it describes how business activity goes up and down over time. There are four stages of the business or economic cycle: expansion, slowdown, recession and recovery.

CPI (Consumer Price Index)

Please also see the entry for inflation.

The Consumer Price Index (CPI) measures how much prices of consumer goods and services change over a period of time. For example, if CPI is 2.5% for the 12 months ending January 2020, this means that on average, the price of consumer goods will be about 2.5% higher than they were in January 2019.

Domicile (e.g. a UK-domiciled fund)

A fund’s domicile is basically its country of residence. It determines how a fund is to be treated from a tax perspective much as your domicile (i.e. your permanent home) determines what tax legislation applies to you. Schroders has a range of unit trust funds that are UK-domiciled while the Schroder International Selection Fund range is domiciled in Luxembourg.

Economies of scale

“Economies of scale” describes how it becomes cheaper to produce something when you are producing large quantities of it. Effectively, production becomes more economical because you can divide the cost over a greater number of units.

Economic cycle

Also referred to as the “business cycle”. Essentially this describes how activity goes up and down over time. There are four stages of the business or economic cycle: expansion, slowdown, recession and recovery.

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Emerging markets

Emerging markets are those countries that have rapidly growing, developing economies and may still be going through the process of industrialisation. This is compared to developed markets which have already undergone this process and are considered to be already economically advanced.

Equities

Also known as “shares” or “stocks”, this represents a share in the ownership of a company.

FCA (Financial Conduct Authority)

The FCA regulates the UK’s financial markets. Its objective is to make financial markets work well – for individuals, for business and for the economy as a whole. More information can be found here.

Fund fair value assessments

This is a new FCA requirement which requires the managers of UK funds to publish reports demonstrating how they are providing value to investors. The FCA has done this in order to ensure that fund managers compete on the value they deliver and act in the best interests of the investors who entrust them with their savings.

Inflation

A measure of the increase in prices of goods and services over time.

KIID (Key Investor Information Document)

A document that summarises a fund’s investment objective, key risks, ongoing charges figure (see OCF) and past performance so that it is easy to compare features across different funds. It is required by EU law.

Liquidity

If it is quick and easy to convert an asset into cash (i.e. to sell it), then it is referred to as a “liquid asset”. If an asset is “illiquid”, it takes a longer time to sell. If you think about selling your home, this could take some time.

OCF (ongoing charges figure)

Please also see TER (total expense ratio). The OCF is made up of the annual management charge (AMC), the administration charge and other operating costs such as the fees that the fund pays to the trustee (or depositary), custodian, auditor and regulator.

Peer group

A group of funds that may be compared with one another, often for performance purposes. A peer group will usually be based on the funds’ investment scope, for example, US equity funds.

Quantitative analysis

Quantitative is often better understood as “numerical”. Typically, it is the use of numbers (or complex mathematical and statistical modelling methods) to make sense of an investment. This is compared to qualitative analysis, which is about using subjective judgment and information that cannot be represented by numbers (such as a company’s culture) to evaluate an investment.

Quantitative Easing (QE)

Quantitative Easing (QE) is a tool central banks can use to stimulate an economy by increasing the supply of money. Technically, it involves the central bank printing new money and using this to buy assets from the financial market. This results in more money being in circulation, higher asset prices and lower interest rates (prices and interest rates tend to move in the opposite direction). This combination makes it more attractive for people to invest, borrow and spend more, driving economic growth. This technique has, in recent years, been used by the European Central Bank, the US Federal Reserve and the Bank of England.

Schroder Investment Management (Schroders)

Schroders is a global investment manager. It actively manages investments for a wide range of institutions and individuals, to help them meet their financial goals.

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https://www.fca.org.uk/about/the-fca

Share class

Share classes are a way to differentiate between different types of shares. For companies, this may mean that some shares have voting rights while others do not. Within a fund, the different share classes may represent different ways of paying the investor the income from the fund, different fees and expenses or different base currencies. For example, a fund will often have an “accumulation” share class and an “income” share class. With the former, any income produced will be automatically reinvested back into the fund (more shares will be bought in the fund). With the income share class, income can either be received as a regular payment or reinvested.

Supranational (bond)

In non-finance terms, “supra” means “beyond the limits of”. So it makes sense that “supranational” refers to an entity which is outside the scope of a single national government. It is usually used in the context of bonds; a supranational bond is one that is issued by an institution such as the World Bank to raise finance. Essentially, a supranational entity is a central body made up of a group of countries which allows for a greater sphere of influence beyond national boundaries.

TER (total expense ratio)

Following the introduction of KIIDs, TERs have been replaced with OCFs. Please see the OCF definition provided above.

Total return

The total return of an investment is the combination of any capital appreciation (or depreciation) plus any income from interest or dividends. It is measured over a set period, and is given as a percentage of the value of the investment at the start of that period.

Unit class

Please refer to share class above.

Unit trust

A type of fund which is structured as a trust. It is split up into equal portions called “units” which belong to the unitholder. The money paid for the units goes into a pool with other investors’ money which an investment manager uses to buy financial instruments on behalf of the unitholders, with the aim of generating a return for them.

Value (investment style)

Value investing is a style of investing that involves buying securities that appear undervalued in the belief that over time, the asset’s relatively low price will rise to more accurately reflect the intrinsic value of the business.

Volatility

Volatility measures the fluctuations in a security’s price. For example, a highly volatile share experiences greater changes in price than other investments. High volatility is taken as an indication of higher risk.

Yield

A measure of the income return earned on an investment. In the case of a share, the yield is the annual dividend payment expressed as a percentage of the market price of the share. For property, it is the rental income as a percentage of the capital value. For bonds, the yield is the annual interest as a percentage of the current market price.

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Important information: This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual

investment and/or strategic decisions. 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 back the amount originally invested. Schroders has expressed its own views in this document and these may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. CS2173

Schroder Unit Trust Limited1 London Wall Place, London EC2Y 5AU, United KingdomT +44 (0) 20 7658 6000

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