Fund Update

For professional investors and advisers only
Schroder ISF* Asian Dividend Maximiser
Fund Update
Covering October 2016
Equity portfolio performance and positioning
Pacific ex Japan equities were modestly down in US dollar terms in October on worries over an impending interest
rate rise by the US Federal Reserve and continuing concerns surrounding Chinese growth. In US dollar terms,
Chinese equities delivered negative returns over the month as yuan depreciation, a step up in property curbs and
tightening liquidity all weighed on sentiment. Australian stocks finished down on concerns over China’s economy.
Meanwhile, in Hong Kong stocks fell as Southbound flows via the Stock Connect scheme with the Mainland Chinese
market, which had driven the market higher over the previous months, dried up amid waning buying interest. Over in
Taiwan, the market gained as strong demand for the new iPhone 7 buoyed the island’s technology stocks. In Korea,
stocks fell on the back of a deepening governance crisis that has hit President Park Geun-hye. In ASEAN, Thailand
and the Philippines both saw their markets fall with the former declining on news of the death of King Bhumibol
Adulyadej – the world’s longest-serving monarch. Indonesia’s market finished flat.
The fund posted negative US dollar returns but fell less than the benchmark in October. Over the month, the fund's
leading contributor was our underweight position in Korea, where the market fell on a governance scandal involving
President Park Geun-hye. Our stock selection in the country also added value. There was also positive contribution
from our overweight position in Taiwan, where technology stocks drove the market higher on better-than-expected
demand for the new iPhone. Meanwhile, the fund's top detractor was our stock selection and overweight position in
Singapore, where the market fell on weak sentiment for the slowing local economy. Negative stock selection in China
also dragged on returns as our holdings in the consumer discretionary sector underperformed the broader market.
On the sector front, technology and consumer staples were the leading contributors while industrials and real estate
were the top detractors.
Performance of option overlay
The option strategy was broadly positive during October in mark to market terms (incorporating the valuation of
outstanding options), contributing 0.34%, even as the markets moved higher. One trade expired during October,
making a positive contribution of -0.03% in net cash terms. 8 of the 39 option positions taken finished above their
strike prices. We continue to apply risk controls to when executing options, by looking for opportunities to increase
averaging and reducing notionals overwritten on names we believe are potential spike candidates.
Outlook and fund strategy
Overall, markets have continued to find momentum this year after a jittery start, but also more recently in face of
events such as Brexit and now the US election. This has also been the case closer to home where several Chinese
stimulus initiatives have continued to take place, rekindling concerns over asset and debt bubbles potentially leading
to systematic risks. The longer term implications of these events and policies should entail further uncertainty and
risks clouding the medium- to long-term outlook for the global economy as well as here in the region.
Regarding Mr Trump’s shock victory, in the near term levels of uncertainty have risen and been accompanied by a
risk in bond yields impacting bond proxy stocks which were looking relatively fully valued. Our bottom-up approach
and focus on longer-term fundamentals may, on a selective basis, see us use any unfounded weakness at the stock
level to add to preferred names where we have longer term conviction on these businesses.
There continues to be positive structural reasons to favour companies paying consistent dividends in Asia, not the
least of which it is one sign of robust corporate governance that a company pays dividends. We remain focused on
reasonably valued companies with solid balance sheets, cash flows, and are operating in segments or niches that
are well placed to ride out continued economic or market volatility. We maintain a bottom-up investment view and
continue to look for good companies where we can see sustainable dividends and potential for capital growth.
Options Strategy
In terms of the overlay strategy, we carried out one new option trade in October; this was a trade running from 6
October to 5 January. We sold options on only 46 of the 65 names held, covering 13.4% of the NAV: we received a
weighted average strike price of 109.66% in exchange for a premium of 1.31%.
** Figures shown for options contributions are calculated internally, unaudited and gross of fees.
*Schroder International Selection Fund. Risk Considerations: The capital is not guaranteed. The fund intends to make regular yield payments to
investors and, if its total return is not sufficient to cover these payments, these payments may reduce the fund's capital. Investments denominated in
a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The
fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The derivative strategy is applied
repeatedly over three-monthly periods. This strategy will increase the income paid to investors and reduce the volatility of returns, but there is the
potential the performance or capital value may be eroded. The fund enters into financial derivative transactions. If the counterparty were to default,
the unrealised profit on the transaction and the market exposure may be lost. The fund makes use of financial derivative instruments. It is expected
that the strategy will typically underperform a similar portfolio with no derivative overlay in periods when the underlying stock prices are rising, and
outperform when the underlying stock prices are falling. Important Information. This document does not constitute an offer to anyone, or a
solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the “Company”). Nothing in this document should be
construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the
basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited
semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An
investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results,
prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has
expressed its own views and opinions in this document and these may change. This document is issued by Schroder Investment Management Ltd.,
31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, all telephone calls are
recorded.
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