Fund Update

For professional investors and advisers only
Schroder ISF* Japanese Equity Alpha
Fund Update
Covering November 2015
Overview
Japanese equities, after a small initial decline, recovered gradually to record an overall positive return of 1.4% in
November. Against this backdrop, October’s relative performance was given back in November, with the portfolio
rising by less than the benchmark. Externally, short-term concerns over the direction of China’s economy seem to
have receded and most attention is focused on the interest rate policy at the US Federal Reserve.
The market and the drivers of fund performance
Japanese equities, after a small initial decline, recovered gradually to record an overall positive return of 1.4% in
November. Sector performance was diverse with big falls in paper stocks and utilities, while retailers, precision
instruments and metal products led the market upwards. Airline stocks, in common with many other tourism-related
stocks, were weak in the aftermath of the terrorist attacks in Paris. The relatively steady progression in the equity
market was undisturbed by the release of GDP data showing that Japan has been in technical recession for the last
two quarters. Equity investors have so far preferred to focus on the improvements already recorded in corporate
profits for the same period, together with more positive, forward-looking data. Indeed it is possible that subsequent
revisions to the GDP data may paint a significantly less negative picture.
Against this backdrop, October’s relative performance was given back in November, with the portfolio rising by less
than the benchmark. Although there was no particular change in the market style, performance was affected by a
fairly smaller number of underperforming stocks. The largest negative contribution came from Dowa Holdings, while
Sony and JAL also underperformed for the month. Most stocks performed in a fairly tight range around the market
but Yaskawa and Omron performed strongly.
The market outlook and portfolio strategy
Although headline data continue to show slower-than-hoped-for growth, the underlying trends still point to a broadbased revival in Japan. In particular, the domestic economy shows encouraging signs in, for example, growth in real
estate lending while conditions in the overall labour market suggest that upward pressure on wages should continue
next year. A key test of the effectiveness of current economic policies will be the trend in capital expenditure as
companies decide whether to commit to increasing domestic capacity in particular. Recent evidence suggests that
this is indeed a factor which is beginning to have a positive impact on growth although it has, so far, failed to make
any meaningful impact on the historic GDP data.
Externally, short-term concerns over the direction of China’s economy seem to have receded and most attention is
focused on the interest rate policy at the US Federal Reserve, with clear expectations that a decision to raise rates
will finally be taken at the next policy meeting. Since this would further extend the gap between US and Japanese
monetary policy, any additional easing of policy by the Bank of Japan seems to be some way off. Leaving aside the
human tragedy, we would not, at this stage, expect events in Paris to have any lasting impact on the equity market or
affect the rapid growth in inbound tourism to Japan which is making an increasingly positive contribution Japan’s
economy.
Activity remained light as there was a relatively low dispersion of returns between most of stocks in the portfolio. No
new positions were added and the number of holdings remains at 31.
The weighting in Dowa Holdings was increased after its rather melodramatic fall and additions were also made to
HIS in the wake of short-term declines affecting most tourism and travel-related stocks. These were funded primarily
by reductions in Nippon Shinyaku which has had a series of strong monthly performances since its inclusion, and
Makino Milling in order to manage the position size.
Important Information: * Schroder International Selection Fund is referred to as Schroder ISF throughout this document. Investments in
emerging markets are subject to market risk and, potentially, liquidity and currency exchange rate risk. Investments in equities are subject to
market risk and, potentially, to currency exchange rate risk. This fund may use financial derivative instruments as a part of the investment proc ess.
This may increase the fund’s price volatility by amplifying market events. This document does not constitute an offer to anyone, or a solicitation by
anyone, to subscribe for shares of Schroder International Selection Fund (the “Company”). Nothing in this document should be construed as
advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its
latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can
be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are
fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the i ncome from them may fall
as well as rise. Schroders has expressed its own views and opinions in this document and these may change. This document is issued by
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