SCHRODER INTERNATIONAL SELECTION FUND1 GLOBAL CREDIT INCOME
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Schroder International Selection Fund1 Global Credit
Income
Think Income. Think Stability. Think Innovation.
Past performance is not a guide to future performance and may not be repeated.
March 2020 1Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation.
What’s next for global credit markets?
Value of assets in central banks’ balance sheets ($ trillions) Global % of negative debt yield
18
BIS sounds alarm on corporate debt pile-up 16
What’s in a A(AA) Credit Rating?
Financial Times, 5 March 2019 ‘…combination of increased BAA issuance and
14 decreased AAA issuance poses financial stability
concerns
Liberty Street Economics – Federal Reserve Bank of NY, 08
12 January 2020
10
8
IMF warns high corporate leverage could threaten
financial stability 6
IMF/Financial Stability Report, 19 April 2019
4 Leveraged finance: a supervisory concern in the Banking
Union?
2
European Parliament Briefing, March 2019
0
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Global % of negative yield debt ($ trillions)
Source LHS: Refinitiv Datastream, Schroders Economics Group, Bloomberg as of October 2019 . Source RHS: Bloomberg, Barclays as of February 28, 2020
1
Think Income.
Think Stability.
Think Innovation.
Source: Schroders.
2
Think Income: Schroder ISF Global Credit Income
An income fund with global credit as the primary source
A dynamic and unconstrained approach with true global diversification
Drawdown mitigation techniques built into proprietary asset allocation
model
No sector or regional biases
Bottom-up credit selection driven by a thematic credit selection process
A Fund designed solely to meet its objective: deliver stable yield 1 while mitigating
drawdowns
Source: Schroders as at 31 January 2020, for illustrative purposes only. 1At the last record date, the A Dis USD share class paid 5.00% p.a. distribution yield at end November. This is a target only and is not guaranteed. In the event that the fund's
performance is less than the intended distributions, the distributions will be made from the fund's capital. Other currency share class yields adjusted to account for hedging cost. Guidelines refer to internal guidelines only that are subject to change.
The distribution rate is reviewed by the investment team on a quarterly basis. Clients are paid distributions on a monthly basis for the A USD Dis share class.
3Think Stability: A global approach with proven alpha delivery from
Schroders
Schroder ISF Global Credit Income performance3 and drawdown4 since inception
Strong performance track record
12%
10%
10,4%
8%
7/9 US$ 6%
Flagship Credit
strategies are top
134bn 4% 5,1%
6,1%
quartile vs. peers over Fixed income
5 years division2 2%
0% 1,3%
YTD 1 Year 2 Year Since Inception (p.a.)
2.01 0%
Sharpe ratio since -2% -0,6%
inception -1,9% -2,3%
-4% -2,7% -2,7%
-6%
-6,1% -5,4%
-8% -6,6% -7,3%
1 year peer group 3 year peer group -10% -8,9%
rank rank -12% -11,0%
Schroder ISF Global Credit iShares Global Corporate iShares Global High Yield JPM EMBI Global Total
Top quartile Top decile Income A Dis* Bond ETF Bond ETF Return Index
1 year max. drawdown 3 year max. drawdown 5 year max. drawdown
Experienced team focused on delivering industry leading performance and downside
mitigation
Past performance is not a guide to future performance and may not be repeated.
1Peer group rank and external ratings as at 31 January 2020. Peer group rank sourced from Morningstar using default primary retail share classes. This does not include three credit strategies due to insufficient track record length (under five years).
2Fixed income division AUM as at 28 June 2019. 3Source: Schroders for performance information as at 31 January 2020. 4Source: Schroders, Bloomberg, Barclays, JP Morgan, BlackRock as at 14 January 2020. The information contained herein: (1)
is proprietary to Bloomberg and/or its content providers; (2) may not be copied or distributed; (3) may not be accurate, complete or timely; and (4) has not been checked or verified by Schroders in any way. None of Bloomberg, its content providers or
Schroders shall be responsible for any damages or losses arising from any use of the information in any way.
4Think Innovation: A proprietary multi-stage allocation process with
drawdown mitigation risk built in
Objectives
Income and drawdown
mitigation
Sleeve managers implement security selection views
Drawdown
mitigation
Economic cycle and
Global Allocation
correlation analysis
Allocation
Validated by Credit
Model
Asset Allocation
and Committee
Optimiser
Expected returns
Sourced from global credit
platform
Constraints
Global Diversification, turnover,
tail loss
Source: Schroders, for illustrative purposes only.
5Capturing upside and mitigating drawdowns
GCI asset allocation decisions
Capture upside (Q1 2017) US rates spike higher (Q1 2018) Preserving capital (Q4 2018)
5 3 1
2
4 0
1
3 -1
0
2 -1 -2
-2
1 -3
-3
0 -4
-4
-1 -5 -5
29-dic.
02-mar.
09-mar.
16-mar.
23-mar.
30-mar.
02-feb.
09-feb.
16-feb.
23-feb.
05-ene.
12-ene.
19-ene.
26-ene.
Schroder ISF Global Credit Income A Dis iShares Global High Yield Bond
iShares JPM US EM Bond ETF iShares Global Corporate Bond ETF
Source: Schroders, BlackRock, iShares, Bloomberg, JPM as of January 2020.
6Thematic credit research approach aims to provide a forward
context to credit research
Themes provide a forward-looking context to credit research
Environmental and Social trends combine with other non-financial external secular trends
Recent research focuses on pensions, gas distribution and the impact of lower rates for longer
Company Sector Theme
Media Viewing trends
Real estate Immigration, urbanisation and e-commerce
Services Urbanisation
Source: Schroders. For illustrative purposes only and should not be considered a recommendation to buy or sell.
7Adoption of streaming accelerates
Case Study: Netflix
Attractive new issue pricing
Market leader: Netflix is the largest subscription video 370
1,0%
on demand (SVOD) provider in the world.
0,9%
350
Bond Spread vs Libor
0,8%
Streaming: the company utilizes data and technology to
improve its services rather than sell it on to advertisers. 0,7%
Portfolio allocation
330
Competition is intense, but penetration is low in the US 0,6%
and especially outside of the US
0,5% 310
0,4%
Content: 7 years ago the company began on its path to 290
build original content. This results in a higher cash burn, 0,3%
but they have more control over content and these are 0,2%
typically front loaded 270
0,1%
0,0% 250
Fundamentals: BB- issue offering attractive relative
value relative to peers
% MV NFLX 3.875% 11/15/29 (ASW, RHS)
Source: Bloomberg as of 13 January 2019.
8An unloved name in an unloved sector
Case Study: Casino
What happened? COFP 3.2480 07/03/24 €
Complicated ownership structure
0,6% Monoprix chairman Regis Schultz
quite France’s Casino group
10%
Three entities through which Jean-Charles Financial Times, 25 June 2019
Naouri owns Casino entered procedure
de sauvegarde 0,5% 9%
At the same time retail/supermarket names
Portfolio allocation
have been under pressure
Bond Yield
0,4% 8%
Recent issues Casino parent Rallye enters
Disruption/price wars 0,3% bankruptcy protection 7%
Financial Times, 23 May 2019
Overleverage/complicated ownership structure
0,2% 6%
Long-term rewards 0,1% 5%
In-depth analysis provides comfort in
senior debt
0,0% 4%
Familiarity with prior issues in supermarket May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20
space (Iceland and Tesco) aided analysis
% MV COFP 4.498 03/7/24 (Yield, RHS)
Position initiated at a yield of 8%+ in €
Source: Bloomberg, FT; as at January 2020, for illustrative purposes only. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and are not to be considered a recommendation to
buy or sell.
9Extracting value in ‘boring’ sectors – waste management
Case Study: Servicios Medio Ambiente (FCC)
Inaugural issuer creating attractive premiums relative to
Solid business fundamentals: FCC is a waste market
management services company
200
180
180 167
Green bond: the issuance will be used to existing green
projects in Spain and the UK. Focusing on Social 160
development goals (SDGs) with the most impact: Pollution 140
prevention and control and clean transportation 120
100
Urbanisation: Fundamentals remain well supported by 80 66
57
population growth and urbanisation trends. 60
The business has been operating in many jurisdictions for 40
over 80 years with high barriers to entry 20
0
Regulatory: limited risk for the company as any price 02/12/2019 (at issue) 12/18/2019
changes are passed on to clients Barclays Euro Aggregate Corporate OAS (ASW, bps)
FCCSER 1.661 12/04/26 (ASW, bps)
Source: Bloomberg, Barclays as of December 18, 2019.
10How are we positioned?
Key portfolio characteristics as at 28 February 2020
Investment grade split (%MV1)
5,5
Strategy EUR
GBP
AUM $3.9bn 32,6
25,6 USD
SEK
Effective Yield 3.5%
EM
11,2
OAS2 +207
Effective Duration 4.8
High yield split (%MV1)
Investment Grade3 74.9%
High Yield3 25.6% EUR
8,3 8,7
GBP
Number of issuers4 615
USD
EM
Average credit rating BBB
3,1
5,4
Source: Schroders, FIA, based on unaudited data as at 28 February 2020. 1MV is Market Value. 2OAS is Option Adjusted Spread. 3May not sum to 100% as forwards, IRS, CDS float and unrated securities are excluded.
4Fund issuer number treats each CDS index as a single issuer. The fund is fully hedged to USD. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and are not to be considered a
recommendation to buy or sell.
11Opportunities in 2020
Summary of our views
Initial signs of optimism Remain defensive while Preference for defensive Emerging markets
in global growth likely searching for sectors
impacted by Covid - 19 idiosyncratic
CB likely to accelerate opportunities
accommodation Preference for IG within the Opportunities in more EM offering attractive
Fiscal policy could be an portfolio defensive non-cyclical sectors opportunities relative to DM
additional support mechanism such as healthcare,
Looking to take advantage of Searching for opportunities in
telecommunications and
US looks to remain more dislocation by adding the corporate and sovereign
utilities
resilient compared to other selectively within HY and space across IG and HY
markets other names that have sold Cyclical and subordinated
off aggressively banking exposure continues
to remain at low levels
Source: Schroders, as at 28 February 2020. For illustrative purposes only.
12Key takeaways
− Income focused objective: Designed with income and drawdown
Distribution yield: 5%
3Y Volatility: 2.0%
mitigation in mind
− Stability: Volatility is here to stay so it is important to have a dynamic
Portfolio credit quality:
Investment Grade *
management approach that minimises drawdowns
− Innovation is important: New techniques and approaches are
needed to manage credit in the environment of tomorrow
Top decile performer vs
category peers
− Diversification: Choose a fund that is not reliant on particular regions
or sectors in the credit market
Don’t follow consensus: It is a crowded market, but experienced
credit teams can uncover opportunities to outperform peers
Source: Schroders, as at December 2019. * Using average ratings across Moody’s, S&P and Fitch. The fund has been investment grade on average over the full life of the
fund. Morningstar references global flexible bond peer group over 3 and 5 years using net of fees A USD share class as at 31 December 2019.
13Appendix
Schroder ISF Global Credit Income Attribution Date Total Return (bps) FX (bps) Rates (bps) Sovereign (bps) Credit (bps) Residual (bps) 20161 127 2 9 16 117 -17 2017 869 16 -3 162 722 -37 2018 -53 112 -21 126 -285 15 2019 1,249 164 209 114 777 -16 Jan-19 228 15 22 27 164 1 Feb-19 100 14 -26 14 100 -2 Mar-19 163 15 96 7 42 4 Apr-19 112 14 -31 9 120 -1 May-19 9 14 111 -5 -107 -3 Jun-19 207 13 47 25 124 0 Jul-19 133 14 23 14 82 1 Aug-19 73 12 129 -20 -42 -7 Sep-19 4 11 -53 11 41 -7 Oct-19 55 12 -37 7 74 -1 Nov-19 14 9 -33 1 36 0 Dec-19 87 13 -51 18 105 2 2020 147 10 127 6 5 -1 Jan-20 147 10 127 6 5 -1 Total 2,489 330 344 460 1,393 -37 Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. Source: Schroders, as at dates specified, gross of all fees, based on end-of-day market prices for benchmark comparison. 12016 since inception 30 November 2016. Please refer to the prospectus for applicable fees. 15
2019 Performance Attribution
Summary
Quarter Portfolio Net Return Positive contributors Negative detractors
– US Energy
– EM Sovereign
– GBP Senior Banks & non-banking fin serv
Q1 2019 +4.5% – EUR Real Estate, Senior Bank, Utilities
– EUR and GBP Services
– Global Rates
– Global Rates
– USD senior banks, energy, telcos
Q2 2019 +3.0% – EUR real estate, utility , telcos, and senior banks - GBP insurer
– EMD sovereigns
– Issuers: VW, Ukraine, EDF, Telefonica, Romania, Achmea
– USD healthcare, utility, senior banking - Global Rates
– EUR Consumer cyclical - EUR Real Estate, Services
Q3 2019 +1.9% – EMD hard currency sovereigns and Healthcare
– USD Energy - EUR Utilities
– Issuers: Pemex, Casino,, Vonovia - EUR and US Telcos
– GBP Senior Banks and Sub Insurance
– USD and EUR Banking - EM Sovereign
Q4 2019 +1.3% – USD services, utilities, and healthcare - EUR real estate
– Single B/BB exposure in USD and EUR - Global Rates
– Issuers: RL Finance, Virgin Money, Santander UK, Nationwide
Source: Schroders, Barclays and Bloomberg as of December 31, 2019. Performance based on SCGCAIU LX, USD A Distributing share class of SISF Global Credit Income.
16Schroder ISF Global Credit Income: Positioning
Flexible allocation across regions and credit quality is key
Investment grade High yield Emerging markets
40% 35% 10% 10%
35% 33% 34%31% 9% 9% 9%
30% 8%
8% 7% 8% 7%
30% 8%
26% 26% 23%
25% 6% 6%
6% 5% 5% 6% 6%
20% 5%
13%12% 4% 3%
15% 11% 12% 4% 3% 3% 3% 4%
3% 3%
10%
5% 2% 2%
0%
0% 0%
USD EUR GBP
USD EUR GBP IG HY
Feb-20 Dec-19 Sep-19 Jun-19 Feb-20 Dec-19 Sep-19 Jun-19 Feb-20 Dec-19 Sep-19 Jun-19
– BBB issuers offer attractive value compared to
– Against a stabilizing macro environment we
single A and the BB portion of the market
see some opportunities to rotate back into – Reducing exposure in EM IG post a strong
– Prefer opportunities within senior banking, high yield rally
healthcare, media and energy sectors
– Looking for opportunities to rotate into the US – Attractive opportunities remain in HY
– After the strong rally in GBP and USD we and have allocated some capital to single B sovereign and corporates
have started to take some profits opportunities in Europe
Source: Schroders as of 28 February 2020.
17Dynamic allocations based on best opportunities
More globally diversified than traditional US biased strategies
100
80
60 2016–2017: Positive macro backdrop/attractive valuations led to a
40 more aggressive portfolio allocation across HY and EMD
20
0
Early 2018: Concerns about US credit valuations and the impact of
abr.-17
jun.-17
oct.-17
oct.-18
ago.-17
abr.-18
jun.-18
ago.-18
abr.-19
jun.-19
oct.-19
ago.-19
dic.-16
dic.-17
dic.-18
dic.-19
feb.-17
feb.-18
feb.-19
feb.-20
higher funding costs on EMD markets led us to reduce US IG and
EMD exposure
DM North America DM Europe (ex UK) UK DM Oceania/Asia
EM Asia EM Europe EM Latin America EM Africa/Middle East
35 100 Mid 2018: EUR IG offered better value than the US. HY
30 90
80 outperformance remained at odds with macro data
25 70
20 60
50
15 40
10 30
20
5 10 Current: Prefer opportunities in IG and EM BB corporates.
0 0 Remain senior in the capital structure within banks and retain
abr.-17
jun.-17
oct.-17
jun.-18
oct.-18
jun.-19
oct.-19
ago.-17
abr.-18
ago.-18
abr.-19
ago.-19
dic.-16
dic.-17
dic.-18
dic.-19
feb.-17
feb.-18
feb.-19
feb.-20
preference for defensive sectors
Gov Rel
EM Gov-Rel
Fin Senior
Non-Cyclicals
Cyclicals
Fin Sub
EM Corporates
DM IG DM HY EM IG EM HY NR
Current
Source: Schroders as of 28 February 2020
18Schroders Global Credit team
A truly global strategy requires a well resourced global team
Credit Allocation Committee
Credit Strategist Lead PMs Quantitative Research
Patrick Vogel
Rajeev Shah Quantitative Research team
Julien Houdain
Portfolio Management – Sub Portfolios
US Pan European Investment US
Pan European High Yield Emerging Markets ABS
High Yield Grade Investment Grade
US High Yield team Pan European IG team US IG team EM team Securitised team
Pan European HY team
New York London New York New York New York
Credit Research
EMEA Research Americas Research Asia Research
Patrick McCullagh David Knutson Raymond Chia
Over 40 Analysts Globally
Sustainability Team
Source: Schroders, as at 28 February 2020.
19Schroders credit platform
A common approach applied across credit strategies
AUM ESG
Benchmark Lead PM(s) Inception Sustainable
(millions) Integrated
Benchmarked Strategies
EURO Corporate Bond ICE BofAML1 Euro Corporate Patrick Vogel €10,177 Jun 2000
EURO Credit Conviction iBoxx Euro Corporate BBB Patrick Vogel €2,131 Dec 2013
EURO High Yield ICE BofAML Euro High Yield Constrained Peter Harvey €1,399 Nov 2012
Sterling Corporate Bond ICE BofAML Sterling Corporate and Collateralised Jonathan Golan £676 Dec 2007
All Maturities Corporate Bond ICE BofAML Sterling Non-Gilt Alix Stewart £1,091 Feb 2001
Long Dated (+15 years) Corporate ICE BofAML 15+ Year Sterling Non-Gilt Alix Stewart £381 Jan 2001
Unconstrained Total Return Strategies
High Yield Opportunities Total Return Daniel Pearson £510 Feb 2000
Strategic Credit 3-Month GBP LIBOR Peter Harvey £2,379 Apr 2006
Strategic Bond Total Return Patrick Vogel £64 Mar 2012
Global Multi Credit Ref2: Barclays Multiverse ex Treasury A+ to B- USD Hedged Patrick Vogel / Julien Houdain $462 Jun 2016
Global Credit Income – Patrick Vogel / Julien Houdain $3,883 Nov 2016
Global Credit Income Short Duration – Julien Houdain €55 Dec 2019
Absolute Return Strategies
EURO Credit Absolute Return 3-Month EURIBOR Patrick Vogel €457 Nov 2015
Sustainable Strategies
Sustainable EURO Credit ICE BofAML1 Euro Corporate Saida Eggerstedt €27 Dec 2019
Source: Schroders as at 28 February 2020.
¹BofAML is Bank of America Merrill Lynch. ²Indicates that index is used for reference only.
20Schroder ISF Global Credit Income
Profile
Global Credit Income
Type Unconstrained Credit Income
Aim1 Attractive yield, drawdown risk actively managed
Expected risk Circa 3–5% volatility, Maximum VaR:Important information This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the 'company'). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the company can only be made on the basis of its latest key investor information document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Europe) S.A. An investment in the company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has expressed its own views and opinions in this presentation and these may change. Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our privacy policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage. Forecast warning The forecasts stated in the presentation are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change. Issued in February 2020 by Schroder Investment Management Limited, 1 London Wall Place, EC2Y 5AU. Registration No 1893220 England. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Sustainability accreditation Our Schroders sustainability accreditation helps investors distinguish how ESG factors are considered across our products. The fund has been awarded an Integrated accreditation. ESG factors are embedded into the investment process and can be clearly evidenced. There is a strong commitment to stewardship and company engagement. For further information about our Schroders sustainability accreditation please visit www.schroders.lu/sustainabilityaccreditation. 22
Contact Schroder Investment Management Limited, 1 London Wall Place, EC2Y 5AU, London. schroders.com
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