For professional investors or advisors only ISSUE 7 SECOND … · International Selection Fund...

For professional investors or advisors only ISSUE 7 | SECOND QUARTER 2013

Invest in 1,001 nights

Funds

Schroder GAIA Sirios US Equity

Schroder ISF1 Middle East

Schroder ISF Frontier Markets Equity

Special feature

The Arab Spring: where is the Middle East headed?

European “concrete gold”

Miscellaneous

Cricket – the fine way to play

Cover photo: Rami Sidani

Schroders ExpErt Q2 / 20132

CONTENTS

2 Contents

3 Editorial

NEWS FROM SCHRODERS

4 Notices

FEATURE

7 Invest in 1,001 nights

iNVESTMENT iDEAS

12 The return of the value investor

FUNDS

14 Schroder GAIA Sirios US Equity

21 Top Performers

22 Schroder ISF Middle East

Schroder ISF

Frontier Markets Equity

JO’S DEMOGRAPHiC

CORNER

32 Almost 300 equity funds

outperformed with

demographic change!

MARKETS

34 Market snapshot

36 Asia rushes to catch up

SPECiAL FEATURE

40 The Arab Spring, the Gulf states

and Iran: where is the Middle

East headed?

46 European “concrete gold”

MiSCELLANEOUS

50 From the UK: A sport for gentlemen –

cricket, the fine way to play

SERViCE

52 History of Schroders: The journey

to becoming one of the most

important merchant banks

54 Schroders’ recommended reading

55 Publishing information

55 Contact: How to reach the

Schroders team

1 Schroder ISF stands for Schroder International Selection Fund throughout the document.


EDITORIAL

“And the winner is...”

Every week, millions of people sit in front of their TVs and

watch the lottery draw. I think most people know

someone who meticulously write down every number

and then nervously compare it with their ticket.

None of their numbers usually match the numbers drawn

– which is actually the case for virtually every lottery

player. Occasionally they get three numbers right, which

induce a small payout, keeping the player playing in spite

of the negative total return.

Realistically, gambling is a futile exercise – the probability

of hitting the jackpot in the Wednesday Lotto game is

1 in 12,271,512 which equates to 0.000008%.

Despite this, millions of people around Europe and in

the Nordic region play the lottery once a week in the

knowledge that they will highly likely lose their stake but

hoping that they may actually win one day.

This begs the question, why, every day, does the fund

industry have customers who get annoyed about

subscription fees or the temporary underperformance of

an otherwise well-running fund and think that shares

mean losing anyway? Especially when the very same

customers sit in front of their TVs on a Wednesday night

waiting to voluntarily lose their money. “Betting” on

winner’s luck like this produces a negative return in the

majority of cases. Whereas with an investment in a fund,

you have a share in productive capital, transparent

performance records and a clear fee structure.

So you know exactly what you get for your money and

actually win more often than you lose.

With a payback rate of 45%, anyone who plays the

lottery has actually already lost more than half of their

money. Regular players gamble away up to EUR 50,000

throughout their lifetime. From this point of view, the

lottery is a particularly unfair game. Putting the money

into savings deposits or funds definitely achieves a better

result – statistically speaking. If you invested your “game

money” of EUR 20 per week in a savings plan over

50 years instead of spending it on lottery tickets, your

savings would accumulate to around EUR 217,000, given

a 5% annual rate of return.

The fund business essentially offers a real chance of

making winnings. During poor market conditions, you

sometimes need to have staying power until an

investment yields the desired return. But the chance of

this happening is a hundred times greater than knowingly

throwing your money out of the window week after week.

Especially if you place your trust in a fund manager with

years of experience who knows exactly which box to

“tick” so that your money is not blown away, but is in

safe hands and intelligently invested. So that “And the

winner is...” is you.

Kind regards

Ketil Petersen | Country Head Nordic Region


NEWs FROM sCHRODERs

Notices

+ + + Top ten in Asia for Schroders + + +

Schroders ranks in the top ten leading fund houses in Asia for both funds under management and net capital inflows – according to a survey by international research firm Cerulli Associates. With managed assets of some USD 31 billion and a market share of 2.5%, Schroders occupied fifth place at the end of 2012. This made Schroders the largest non-Asian active manager, ranking ahead of Fidelity, BlackRock and J. P. Morgan Asset Management. In terms of net new money, Schroders was in sixth place at the end of 2012.1

+ + + Acquisition of STW Fixed income Management + + +

Schroders is acquiring American bond specialist STW Fixed Income Management LLC (STW), which extends its portfolio to include US fixed income products. An asset manager headquartered in California, STW is responsible for USD 11.9 billion in client funds and works for over 100 institutional clients. The company invests in investment grade US bonds denominated in US dollars and purchases undervalued bonds within a rigorous value approach. STW therefore invests independently of benchmarks and takes no bets on interest rates. Since the company was founded in 1985, several of its bond strategies, including various duration and tax-efficient products, have generated top-quartile results.

+ + + Schroders expands GAiA platform + + +

Schroders has added the US equity fund Schroder GAIA Sirios US Equity2 to the GAIA platform, which was set up in 2009 for UCITS-compliant alternative investment strategies. A long/short fund based on fundamental analysis, it invests predominantly in large and mid-cap US equities. Because it is unrestricted, it can profit from both rising and falling prices. The fund is managed by Boston-based US fund boutique Sirios Capital and co-founder John Brennan. The strategy of the Schroder GAIA fund is based on the Sirios US Equity Long/Short. Between its launch in July 1999 and the end of 2012, the latter has produced a cumulative return of 214.23% at volatility of less than 10%, compared with 33.44% by the S&P 500. The historical correlation with the S&P 500 is low at 0.38, as are the correlations with other equity markets.

Find out more about the fund on page 14

1 Source: Ignites Asia. Date: 06.03.2013 2 Schroder GAIA Sirios US Equity is not registered in Norway.


NEWs FROM sCHRODERs

1 Source: Morningstar. As at: 8 March 2013. 2 Performance over one year: 08.03.2012 – 08.03.2013. Source: Morningstar. Net Asset Value – NAV, EUR, Pretax.

+ + + Schroder iSF Global Demographic Opportunities – the best of 300 equity funds + + +

Schroder ISF Global Demographic Opportunities, which was launched in 2010, proves that demographic funds are more than just a marketing ploy. In Morningstar’s “Barometer global equity growth” category, its class A unit denominated in US dollars has held pole position for over a year1 out of a total 286 funds with a performance of 20.95%. In its peer group, the fund has been in the first quartile in all periods since it was launched. A themed fund that focuses on global demographic change, it also has the edge in the “Currency hedged global equity” category. With a performance of 20.01%, its Euro hedged class A unit lies in second place in a category comparing 153 funds. Managed by Charles Somers, the equity fund looks to spot global demographic trends at an early stage, investing in companies profiting from from demographic trends and shifts in wealth. Its aim is to outperform the MSCI All Countries World Index within a one-year period. Its benchmark recorded a performance of 9.29% over one year, considerably below Schroder ISF Global Demographic Opportunities.2

+ + + Schroders launches three new emerging market bond funds + + +

Schroders has extended its range to include three new products for Nordic investors. Schroder ISF Emerging Market Bond, Schroder ISF Emerging Markets Corporate Bond and Schroder ISF Emerging Market Sovereign Bond follow a relative return strategy and complement the established emerging market bond fund Schroder ISF Emerging Markets Debt Absolute Return, which takes an absolute return approach. In the present low interest environment, investors in emerging market bonds can achieve higher returns with a similar quality of asset and have the possibility of generating higher total returns than with developed market bonds. “Approximately 80% of emerging market bonds issued last year have investment grade status and are therefore also suitable for more conservative investors,” explains James Barrineau, Co-Head of the Emerging Market Debt Relative Team. The new products will be managed by the Emerging Market Bond Team. Consisting of 11 managers and headed by James Barrineau, the team has recently acquired several new top-class hires.


NEWs FROM sCHRODERs

Source: Schroders. Date: 21.02.2013.

+ + + Schroders achieves two first places in Morningstar Fund House Awards + + +

Schroders came first place in two of the five top categories at the 2013 Morningstar Fund Awards in Norway and Finland. The British asset manager was crowned the winner of the categories Best Fund House Larger Equity and Best Fund House Multi-Asset in 2012. The Morningstar Award in the Best Larger Equity category honours asset managers with at least 20 funds rated by Morningstar that are authorised for sale in Norway and Finland, respectively, and posted a better risk-adjusted performance in the past year than their peers on a quantitative basis. The Best Fund House Multi-Asset accolade is based on the performance of at least five equity funds and five bond funds with a Morningstar rating. On a European basis Schroders also won the two awards in France, Germany, Spain, Switzerland and the UK.

+ + + Schroder iSF Global Multi-Asset income already worth half a billion + + +

By February, barely nine months since launch, Schroder ISF Global Multi-Asset Income already managed assets in excess of EUR 500 million. The fund was launched on 18 April 2012 to cater for the demand for income from unconstrained, flexible investments in a multitude of countries, sectors and markets, as well as from currency positions. To achieve its objectives, it focuses on searching for securities offering high dividend or bond yields. Fund manager Aymeric Forest aims to generate a fixed, sustainable distribution of 5% p.a., payable on a quarterly basis for the euro-hedged unit class. The unit class denominated in US dollars distributes in monthly payments. The fund manager’s overall aim, besides sustained returns, is to manage portfolio exposure to achieve volatility of 7% to 12%.

invest in 1,001 nights

What do you associate with the Middle East? Do you think of picturesque palaces, laden with precious stones and luxurious carpets? Beautiful ladies of the harem turning heads with their belly dancing? Fascinating bearded storytellers smoking on water pipes and sending shivers down the spines of their audience? Bazaars full of spices and fine fabrics? Well, it doesn’t hurt to dream.

uuu


FEAtUrE

7

As with all western reverie, if you take a more realistic look at this region, the Middle East is predominantly perceived as an oil supplier

and most recently as a trouble spot.But as well as oil, the region also offers excellent

investment opportunities. The economic importance of the countries in the eastern Mediterranean and Persian Gulf is often greatly underestimated. Collectively, the countries in the Cooperation

Council for the Arab States of the Gulf (Bahrain, Kuwait, Qatar, Oman, United Arab Emirates, Saudi Arabia), plus Turkey and Israel, have a higher GDP than do Russia or Brazil. With a GDP of

an estimated USD 2.7 billion, exceptionally high growth rates and a business climate oriented towards the needs of the international economy, the Gulf region is one of the most attractive investment locations in the world. Amongst the emerging markets, this “Greater Middle East” (GME) region occupies second place behind China.

Crude oil and natural gas – the basis for seemingly endless wealthUntil the 1960s, large parts of the GME region were just a blank area on the map of economic development. The backbone of its economy comprised pearls, dates, fish and low-scale regional trading. Although British adventurer William Knox d’Acry came across the first crude oil deposit in the Middle East near the southwest Persian city of Masdsched-e Soleiman in 1908, it wasn’t until after World War II that crude oil became the single most important commodity. Within two decades, liquid hydrocarbons covered around 40% of global energy demand.

And the Gulf region also meets a considerable part of the growing global demand for natural gas. Qatar alone, a country around the same size as the Swedish Skåne County, holds more than 12% of the world’s proven gas reserves.1

“The Middle East – more than just an oil supplier”


FEAtUrE

8

1 Source: BP Statistical Review. As at: 30 June 2012.

GDP compared to other countries

Nominal GDP 2012e

16,000

15,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

USD millions

US

A

Chi

na

Jap

an

Ger

man

y

GM

E*

Fran

ce UK

Bra

zil

Italy

Rus

sia

Ind

ia

Can

ada

Aus

tral

ia

Sp

ain

Mex

ico

Kor

ea

Ind

ones

ia

Türk

ey

Net

herla

nds

Sw

itzer

land

Sw

eden

Nor

way

Bel

gium

Pol

and

Taiw

an

Aus

tria

* GME: MSCI Arabian Markets: Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco,

Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates and Turkey. Source: IMF DataMapper. October 2012

This has led to extreme economic, social and political change for these countries. The sudden wealth from oil production gave rise to follow-up industries and a requirement for services. Within a single generation, the entire society transformed from a pre-modern system to one on a par with western industrial countries. The countries also needed to reorganise their state apparatus (Saudi Arabia set up a Council of Ministers, introduced a country-wide administrative system, expanded its infrastructure and supplemented Islamic Sharia law with further legislation).

Young, dynamic, up-and-comingNevertheless, the GME countries, with the exception of Israel, are still in a very early stage of their economic growth. Which also means that their growth will gather pace very quickly in the near future, offering numerous opportunities. Consequently, investments in local companies provide access to some of the most dynamic economies in the world.

This potential goes hand in hand with a very young and fast-growing population: almost 60% of the 220 million people living in the region are currently

under 30 years of age. Population growth will also remain high, as has been the case in recent decades. For example, the population of the Emirate of Dubai rose from 40,000 in 1960 to over 2.1 million in 2013.

Abu Dhabi was a small town of 4,000 inhabitants in the 1960s – today it is home to more than 2.5 million people. This rapid increase in population has been due mainly to the almost daily immigration of foreign workers. The necessary capital for further economic expansion and diversification is also available, as the rich oil and gas deposits will continue to satisfy the global economy’s growing hunger for energy for decades to come.

Levels of development of emerging economies

Source: Schroders. Date: January 2013.

The countries of the GME region offer hope of quick growth as they are still in a very

early stage of development.

Frontier Markets

Market liberalisation

Emerging economies premium growth (5-7%)

Established growth (3–5%)

Developed markets (2–3%)

Mat

urity

Time

Frontier Markets IndiaChina

RussiaGME region

Czech Republic/Poland/Hungary

Malaysia

Brazil

Mexico

South Korea

Taiwan

Hong Kong/ Singapore G7

“Adventurers discovered oil reserves as long ago as 1908”

“60% of the population is under 30 years of age”


FEAtUrE

9

Using the opportunities of globalisationDespite all this, black gold will not last forever to pay for the costs occasioned by this growth. Sooner or later, other sources of revenue will have to be found. The service sector already accounts for almost 50% of economic performance in the GME countries plus Morocco, Egypt and Jordan, and increasing prosperity is growing demand for consumer goods and financial products.

The relatively oil-poor Dubai was one of the first countries to realise that depending solely on oil and gas would not be sufficient for the future and reorganised its economy within a few decades. Oil production now accounts for less than 5% of the emirate’s economic performance. The favourable geographical location of Dubai and the other countries also offers enormous potential: the Gulf states lie midway between Europe and the up-and-coming countries of Asia and Africa. Two billion

people live within a radius of four flight hours of the Gulf of Arabia. Fly another four hours and you reach more than half the world’s population. The GME economies are now exploiting this geographic advantage systematically. They have turned themselves into a traffic and trading hub for the global economy. By 2017, Dubai will have one of the largest airports in the world, designed to transfer around 22 million tons of freight and handle more than 160 million passengers each year.

There are numerous such examples. In the Emirate of Abu Dhabi, it is not only the service sector that is playing an increasingly important part, but also aeronautical engineering, semiconductor technology and aluminium production. The billions in investment in the various universities of the country also mean that Abu Dhabi is a very highly regarded education location and is catching up fast on the US.

Dubai City of the gigantic skyscrapers.


FEAtUrE

10

Reasons for investing in GME economies:

− Accelerating market liberalisation is stoking the economy.

− The local growth topics differ from the drivers in other regions and emerging markets.

− Because they have little correlation with other emerging markets, GME countries are particularly suitable for diversifying global portfolios.

− The relatively low level of foreign investment and lack of market monitoring by analysts are generating market inefficiencies, creating attractive earnings potential.

The financial discipline of many GME economies is also impressive. High growth is often combined with relatively low rates of inflation. The extra revenue generated from rising oil prices has enabled governments to consolidate their national budgets. Many GME countries now have low levels of debt and high levels of foreign currency reserves.

How to profit from the attractive growth conditionsAlthough there is not a lot of market analysis available, private investors should be wary of going it alone in the GME region. They are much better off turning to specialised funds such as Schroder iSF Middle East or Schroder iSF Frontier Markets Equity to profit from the boom in the region.2


FEAtUrE

11

2 For more information on the two funds see page 22-29 and performance on page 21.

GDP growth and inflation

STRONG GROWTH AND MODERATE iNFLATiON

Source: EFG Hermes. As at: January 2013.

Real GDP growth Consumer price index

25

20

15

10

5

0

45

40

35

30

25

20

15

10

5

0

per year in % per year in %

Bah

rain

Egy

pt

Jord

an

Kuw

ait

Leb

anon

Mor

occo

Om

an

Qat

ar

Sau

di A

rab

ia

Tuni

sia

Turk

ey

UA

E

Bah

rain

Egy

pt

Jord

an

Kuw

ait

Leb

anon

Mor

occo

Om

an

Qat

ar

Sau

di A

rab

ia

Tuni

sia

Turk

ey

UA

E

n 2001-2011 Compounded annual growth rate n 2012

n 2001-2011 Compounded annual growth rate n 2012

Funds

12Schroders ExpErt Q2 / 2013

INVEStMENt IDEAS

12

By Tobias Eppler, Investment Analyst at Schroders in Frankfurt

Value managers focus on companies with a lower valuation (such as low P/E ratios) and stable profit growth. Companies that fit this

picture are usually mature and conservatively managed with established market positions. Furthermore, the equities of these companies trade on stock exchanges without a risk premium; in other words their loss potential is expected to be limited if markets fall.

The future lies in focusing on a growth investment style. What makes an equity appealing is not its current value, but rather the expectation of above-average future growth in sales and profits.

Its valuation is therefore less important for growth managers than for value managers. Above all, what growth managers focus on is high future profit growth. As a result, the equities of such companies also trade on stock exchanges with a growth premium. The most extreme form of a growth strategy would be investing in a start-up company – hardly any assets but plenty of growth potential. Such companies can often be found in the technology sector.

One of the biggest challenges in the growth versus value tug-of-war is to identify in good time whether growth equities are becoming too expensive. It is then time to switch to a value strategy. In such cases, international institutions tend to follow the herd instinct and invest at the same time in cheap equities for months and sometimes even years. The last major

value cycle ran from 2001 to 2008 – the period after the 2001 recession and the bursting of the technology bubble. Growth equities dominated predominantly from the end of 2008 to 2012. This was a period in which many companies reorganised after the financial crisis and gradually improved their profits.

Although this year has only just begun, it looks as though investors could be swinging back to value strategies in the US. For example, the S&P 500 Value Index has gained 11% year-to-date, compared with a gain of only around 8% by the S&P 500 Growth Index.

A value cycle’s main advantage is that a value strategy consciously avoids overvalued equities, which reduces the risk of losses. In contrast to growth equities, which are often near the apex of their popularity (and price) when markets are overbought, value equities usually offer higher upside.

Popular growth equities, such as Apple, bear the load of unrealistic profit expectations and any disappointing news of falling profits leads to selling. Since its 52-week record high of over USD 700 in September 2012, the Apple equity price has plunged to around USD 460.

Although short-term trends can be misleading, there are other signs of a swing back to value strategies. According to Morningstar, global large-cap value funds have gained 8.40% in the 12-month period to 26 March 2013. In contrast, global large-cap

The return of the value investorGrowth equities sometimes dominate the market, with companies expected to continually achieve above-average profits. But once these equities fall out of favour, the spotlight returns to value equities, which are bought cheaply compared with their market potential.

Funds


INVEStMENt IDEAS

13

growth funds have gained only 6.40%. The value trend is also being supported by current net inflows and outflows of cash. Investors have been investing increasing amounts in large-cap value funds since the start of the year. More than USD 3.3 billion had already been invested by the end of February. During the same period, more than USD 3.6 billion had been withdrawn from growth funds.1

Past experience shows that the value and growth styles alternate with each other during a market cycle. It is very difficult to predict which of the two investment styles promises the most success. But one

thing is sure: viewed in historical terms, a value approach is better for investors pursuing a long-term investment strategy. Especially considering the strong market rally in recent weeks. But mainly because investors are starting again to behave in a more rational manner and paying more attention to fundamental values of companies. In market phases such as this, value strategies have shown in the past to work particularly well.

Consequently, Schroders offers a number of interesting value strategies.

1 Source: Morningstar Direct. As at: 28 February 2013

investment name Cumulative returns Annualised returns

MSCi World Value NR USD 89.98% 4.37%

MSCi World Growth NR USD 65.17% 3.40%

MSCi Germany Value NR LCL 76.45% 3.86%

MSCi Germany Growth NR LCL 23.94% 1.44%

MSCi Europe Value NR LCL 71.77% 3.67%

MSCi Europe Growth NR LCL 45.08% 2.51%

MSCi USA Value NR USD 70.02% 3.60%

MSCi USA Growth NR USD 76.51% 3.86%

MSCi Japan Value NR JPY 37.73% 2.16%

MSCi Japan Growth NR JPY –36.78% –3.01%

Period: 26 March 1998 to 25 March 2013.Source: Morningstar Direct.

Value strategies always outperform growth strategies in the long term

10-year performance Performance – current year

Source: Schroders, Bloomberg. As at: 26 March 2013.Source: Schroders, Bloomberg. As at: 26 March 2013.

S&P 500 Value Index (USD) S&P 500 Growth Index (USD) S&P 500 Value Index (USD) S&P 500 Growth Index (USD)

150

100

50

0

–50

12

10

8

6

4

2

0

Performance in % Performance in %

Trend reversal?

03/03 12/12 01/13 02/13 03/1303/1303/1103/0903/0703/05

Funds


Schroder GAiA Sirios US Equity

Schroders expands its GAiA platform with Schroder GAiA Sirios US EquitySchroders has added a new US equity fund to its GAiA platform for UCiTS-compliant, alternative investment strategies, which was established in 2009. Schroder GAiA Sirios US Equity is the new family member on the GAiA platform and now authorised in the Nordic countries.

Funds


How Schroder GAiA works

n Specialised in the management of alternative investment strategies

n Proven track record

Hedge fund managers

Schroder GAiA(UCITS-IV-Platform)

Luxembourg

n Manager selection

n Distribution, marketing and client service

n Management and supervision of GAIA

Schroders

n Manager selection

n Rigorous examination of potential hedge funds (due diligence)

n Risk management

Schroders NewFinance Capital

Schroder GAIA Sirios US Equity is a long/short fund, based on fundamental analysis, which invests

mainly in equities of large or mid-sized US companies. Because it is unrestricted, it can profit from both rising and falling prices. Long investments are made in attractively valued, growth-oriented companies. Short positions are taken in companies with weak balance sheets or whose fundamental trends are deteriorating. Exposures in bonds are also permitted under the UCITS regulations, provided equity-like earnings can be achieved with low risk, especially during exceptionally weak phases in the equity markets.

“We see an enormous interest in our GAIA strategies, which in the past were often inaccessible to private investors. We recently had to close our Schroder GAIA Egerton Equity due to the large demand for alternative strategies. Structurally, Schroder GAIA Sirios US Equity is a very similar product with a long and successful history. However, unlike Schroder GAIA Egerton Equity, it focuses on the US equity market. Sirios is a specialised US equity manager with successful fund managers, and we are pleased to be able to make this established strategy available to Nordic investors as well,” says Lars K. Jelgren, Head of Intermediary sales in the Nordic region.

The fund is managed by the Boston-based US fund boutique Sirios Capital and its co-founder, John Brennan. The strategy of the new Schroder GAIA fund is based on Sirios US Equity Long/Short, which achieved a cumulative return of 214.23% with a volatility of less than 10% in the period from its launch in July 1999 until the end of 2012.1 In contrast, the S&P 500 Index only gained 33.44%. Historical correlation with the S&P 500 Index is low (at 0.38), as is the correlation with other equity markets. This provides excellent opportunities for diversification. The downside risks of the Sirios strategy were also much lower than those of the benchmark. During the financial crisis,

Funds


the fund lost no more than 19%, whereas the S&P 500 Total Return Index shed around 51% at the peak.1

In the current market situation in particular, numerous factors favour long/short exposure in the US market: the phase of high correlations after the crisis of 2008, in which the performance of individual stocks exhibited high synchronism, is coming to an end.Company-specific fundamental trends are leading to more strongly diverging prices. “Single value oriented long/short

1 Source: Sirios. As at: 31 December 2012.

Performance of the John Brennan Sirios US Equity Long/Short Fund

managers are now discovering optimum opportunities for returns in the US market,” says John Brennan.

On the long side, the investment philosophy entails buying equities of companies with high long-term earnings growth potential, provided their prospects are not yet reflected in the valuation. In such cases the fund management focuses, for example, on new products or markets and changes in price trends. But it also looks at acquisitions, cost reductions, restructurings and changes in

management remuneration. Investments are mainly in highly liquid securities with a market capitalisation of more than USD 1 billion.

The fund focuses on the US market. Between 40 and 60 long positions are held. Stocks in which the management is particularly confident usually receive a weighting of 5-7%. The portfolio is balanced over five large sectors, with a higher exposure generally in two to three sectors. All long positions are chosen for investment purposes on the basis of

Source: Sirios. As at: 31 December 2012. Data since launch in July 1999.

250

200

150

100

50

0

–50

Return in %

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

n JB Sirios – Cumulative Returns n S&P 500 – Cumulative Returns

Downside risk of the Sirios strategy considerably less than index

Source: Sirios. As at: 31 December 2012. Data since launch in July 1999.

10

0

–10

–20

–30

–40

–50

–60

Return in %

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average

n Sirios US Equity Long Short Fund n S&P 500 TR Index

Funds


fundamental, company-specific bottom-up analyses. Core investments on the long side are therefore held for approximately three to five years.

The short side of the portfolio essentially comprises 50 to 70 positions, most of which have a weighting of 0.5-1% and are held for less than one year. Similar to the long exposures, the short exposures are selected on the basis of fundamental analysis. The main focus is to identify which companies will experience a greater deterioration than the wider market expects. Particular attention is also paid to vulnerable balance sheets, for example where high debt ratios could lead to insolvency or significant stock losses.

The risk in the fund is managed on four levels. Financial risks are limited by

restricting gross overall exposure (long and short sides together) to 200%, market risks by controlling net exposure. Industry risks are controlled by confining each of the five largest sectors to a weighting of not more than 35% of the net asset value. Equity risks are limited by restricting the maximum weighting of individual securities to 9% on the long side and 2% on the short side.

Currently, USD 2.19 billion are managed on the GAIA platform.2 It includes Schroder GAIA CQS Credit, Schroder GAIA Egerton Equity and Schroder GAIA Sirios US Equity, all of which are managed by external managers, as well as the internally managed products GAIA QEP Global Absolute and Schroder GAIA Global Macro Bond.

2 Source: Schroders, as at 30 March 2013.

The Sirios US Equity Long/Short Fund compared to the S&P 500 Total Return index

The maximum loss of the Sirios US Equity during the financial crisis amounted to 19%, compared to a 51% loss by the S&P 500 Total Return index.

Source: Sirios. As at: 31 December 2012

0

–10

–20

–30

–40

–50

–60

in %

07/9

9

11/9

9

03/0

0

07/0

0

11/0

0

03/0

1

07/0

1

11/0

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03/0

2

07/0

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11/0

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03/0

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07/0

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11/0

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03/0

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07/0

4

11/0

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03/0

5

07/0

5

11/0

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03/0

6

07/0

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11/0

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03/0

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07/0

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11/0

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03/0

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07/0

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11/0

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07/0

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03/1

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07/1

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1

11/1

1

03/1

2

07/1

2

11/1

2

n Sirios U.S. Equity Long/Short Fund n S&P 500 TR Index

Andrew Dreaneen

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Hello Andrew – the GAIA family has increased in size and naturally a few questions have arisen. How and why did you select this fund for the GAIA platform?This question can be divided into two parts: first, why did we set up a US-focused long/short equity fund on the GAIA platform, and second, why did we choose Sirios as the investment manager?:

n Why a US-focused long/short equity fund within the GAIA?In the past, our clients regularly pointed out to us that high-quality long/short managers with a focus on US equities are considerably underrepresented in the UCITS universe. For example, according to Alix Capital, only 10% of the individual managers of alternative UCITS in the long/short space are focused on the US, while 47% are focused on Europe. Furthermore, there are only 18 funds within the Morningstar category “Alternative - Long/Short Equity – US”, compared with 111 in the European category.

n Why Sirios?Sirios Capital Management (Sirios) is a Boston-based hedge fund manager that was founded in 1999. John Brennan, the founder of Sirios and portfolio manager of Schroder GAIA Sirios US Equity, has 27 years of asset management experience and a successful track record in several bull and bear markets. Brennan is supported by an experienced investment team consisting of 10 investment specialists known for their prudent and reasonable approach to asset management. The investment team has a successful track record of more than 13 years in the management of fundamental long/short investment strategies focused on the US. Sirios is a genuine long/short manager with proven skills in selecting stocks and managing exposures and risks. Its strategy

stands out in particular from its peers with regard to the protection against risks of loss. Furthermore, the long/short equity strategy managed by Sirios is liquid and diversified. As a result, it is easily able to meet the UCITS requirements – one of our essential conditions.

The main focus is on the US – why? Where do you see the potential?This question actually has two parts. Firstly, what makes the US an attractive market at the moment and secondly, why does it pay to invest in a long/short equity fund instead of a long-only equity fund?

n Why invest now in the US?The US economy is in the initial phase of a recovery. From a corporate viewpoint, the political uncertainty that has been hampering investment and spending in recent years is diminishing. US corporation tax is set to be reduced in the short term in order to create more jobs. In addition, US banks are in a very strong situation with regard to capitalisation and are willing to provide loans. They are also better placed to start granting consumer loans again. Consumers should profit from the generally low interest rates and from residential real estate prices, which have rarely been so affordable. Taken together, these and other factors, such as the exploration and production of oil and natural gas, make the US a strong investment environment compared to other global regions.

n Why a US-focused long/short equity fund at this point in time?

Fundamental factorsThere are macroeconomic signs that a global recovery is taking shape. However, from a fundamental perspective, many of the broadly-based macroeconomic factors should now be seen as currents and no

We also asked Andrew Dreaneen, Schroder GAIA Product Manager, about the new fund on the GAIA platform.

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Schroder GAiA Sirios US Equity

Unit class A, USD, acc. Unit class A, EUR hedged, acc.

ISIN LU0885727932 LU0885728310

Inception 27.02.2013 27.02.2013

Benchmark S&P 500 Total Return

Entry charge Up to 3% of the total subscription amount3

Annual management fee 2.00%

Performance fee Subject to the “high water mark” principle, 20% of the unit class outperformance in excess of the BBA Libor USD 3 Month Act 360

Fund manager John F. Brennan

3 Equates to 3.09278% of net asset value per unit.

longer as strong headwinds or tailwinds. The environment is currently much more favourable for stock-picking. This is because different companies are exposed to the trends in very different ways, depending on the geographical mix of their operations, their dependence on the commodities sector and the demographics of their customer basis. The environment is perfectly suited to company-specific stock-pickers among long/short equity funds, which can profit from opportunities in long and short positions. From a global point of view, the recession in Europe is likely to last, offering plenty of chances for positive contributions from short positions, while growth prospects in the US appear robust despite the global challenges, opening up opportunities in long positions. Even within a single country, such as the US, the amount of exposure, and therefore the level of risk, varies dramatically from one company to the next. For instance, against a backdrop of low commodities prices and the unrivalled affordability of housing, opportunities have arisen in long positions, while the outlook for some listed US companies with large holdings

worldwide (particularly Europe) creates upside potential in short positions. Finally, equity valuations are broadly attractive; in fact, compared with corporate bonds, equities appear extraordinarily undervalued. However, equities will need to benefit from considerable tailwinds before there is a lasting shift into this asset class.

Technical dataSince mid-2008, long/short equity strategies have faced a double challenge in the shape of extremely high correlation coupled with low dispersion (an environment in which macro managers tend to prosper more). However, in the fourth quarter of 2011, equity correlation fell. This has led to the current situation in which fundamental long/short equity strategies are likely to fare better. The historically strong performance of long/short equity strategies between 1999 and the beginning of 2003 also coincided with decreased correlation and increased dispersion.

Can you tell us something about the investment process for Schroder GAIA Sirios US Equity?Schroder GAIA Sirios US Equity is a fundamental long/short equity fund with a focus on preserving capital in falling markets. It concentrates on mid to large caps from the US and also allocates assets to Europe and Asia. Sirios takes an approach that does not depend on the capital structure, so it can invest opportunistically (up to 35%) in bonds offering similar returns to equities but with lower risks when the markets are under pressure or undergoing periods of stress. Although the strategy usually has a long focus (20-80%), Sirios also has a short book and has thus been profitable since inception.

The investment process for Sirios is based on ideas that are generated with the help of company-specific research within each sector. The analysts are responsible for long and short ideas within their own sector. Each sector consists of a well-defined universe of mid and large caps, and Sirios makes a running comparison between long-term earnings guidance and consensus expectations. The positions

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with the greatest positive variance are potential long positions for which valuations are examined to find out whether they have the best risk-adjusted upside potential. The selection process for short positions follows the same fundamental approach: company-specific analysis with a focus on the greatest variances in terms of an expected fundamental deterioration compared with the consensus. In addition, Sirios keeps a particularly watchful eye out for weak balance sheets, where a high debt/equity ratio could lead to a potential insolvency or severe dilution of shareholder value. Positions are only ever taken following a thorough due diligence process and financial modelling of the

company’s outlook. Equally important are company visits and meetings with executive management, suppliers, competitors, stock market analysts, industry experts and consultants.

Who is the product suitable for?Schroder GAIA offers access to leading hedge fund managers. In the case of Schroder GAIA Sirios US Equity, the fund is managed by an experienced team of investment specialists with a proven track record. The fund is suitable for investors who are interested in achieving returns similar to those on equities, but with lower volatility and active risk management to reduce falls in value. The fund is suitable for professional investors

such as private banks, family offices and fund-of-fund managers. It is suitable for asset management mandates. However, in the case of other clients, it should only be sold or considered on an advisory basis.

Many thanks for the interview, Andrew.

If you have any questions on this product or other Schroders funds, please get in touch at: [email protected]

n The fund may hold long and short positions in shares of companies. It is focused on the US, but can also invest worldwide.

n The fund’s investments in companies are based on thorough analysis of the companies’ financial and operational strengths. With long positions, the focus is on companies with large and medium market capitalisation, typically offering high potential for earnings growth combined with an attractive valuation. Short positions are focused on companies with falling earnings, low revenues and a difficult forecast growth outlook. The fund’s net position may be long or short.

n The management company also seeks to reduce volatility and avoid big capital losses by shorting individual stocks, investing in bonds and increasing cash positions.

n The fund may invest in other financial instruments (including bonds and convertible bonds) and in time deposits. Derivatives can be used to achieve the investment objective, lower risk or manage the fund more efficiently. The fund may make use of leverage.

n The capital is not guaranteed.

n The value of the fund will move similarly to the equity markets. Emerging equity markets may be more volatile than equity markets of well established economies.

n The title of securities may be jeopardized through fraud, negligence or mere oversight in some countries. However the access to such markets may provide a higher return to your investment in line with its risk profile.

n The Fund may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate where relevant.

n The Fund may be leveraged, which may increase the volatility of the Fund.

n The Fund may not hedge all of its market risk in a down cycle. Investments into foreign currencies entail exchange risks.

n Investments in money market instruments and deposits with financial institutions may be subject to price fluctuations or default of the issuer. Some of the invested and deposited amounts may not be returned to the fund.

n The investments denominated in a foreign currency of the share-class may not be hedged back to the currency denomination of the share-class. The share-class will be positively or negatively impacted by the market movements between those currencies.

investment investment risks

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The table shows a selection of Schroders funds that are among the top performers in their peer group in the current year and over one, three and five years.

Top performers

Schroder iSF Quartile Ranking/ peer group

Peer group Morningstar

Performance of the fund (converted into euro)

Current year – 32 Schroders funds in the first quartile

Schroder iSF Middle EastA, USD, acc., LU0314587907

1 2 / 27 Africa & Middle East Equity +13.83%

Schroder iSF Frontier Markets EquityA, USD, acc., LU0562313402

1 2 / 12 Global Frontier Markets Equity +15.24%

Schroder iSF Global Convertible BondA, USD, acc., LU0351442180

1 1 / 18 Convertible Bond – Global +8.54%

Schroder iSF Global High income BondA, USD, acc., LU0575582027

1 1 / 158 Global Bond +5.90%

1 year – 37 Schroders funds in the first quartile



Schroder iSF Emerging EuropeA, EUR, thes., LU0106817157

1 3 / 56 Emerging Europe Equity +12.69%

Schroder iSF Global Demographic OpportunitiesA, USD, acc., LU0557290698

1 2 / 106 Global Large-Cap Growth Equity

+20.42%

Schroder iSF Global High income BondA, USD, acc., LU0575582027

1 6 / 145 Global Bond +15.09%

3 years – 42 Schroders funds in the first quartile







Schroder iSF Taiwanese EquityA, USD, acc., LU0270814014

1 1 / 10 Taiwan Large-Cap Equity +11.58%

5 years – 39 Schroders funds in the first quartile







Schroder iSF Global Climate Change EquityA, USD, acc., LU0302445910

1 2 / 23 Sector Equity Ecology +3.37%

Source: Schroders, Morningstar. As at: 8 April 2013. Performance based on the net asset value of the given unit class on an EUR basis/converted into EUR. Calculated net of the annual management fee and internal fund costs and based on reinvestment of all income (BVI method). Foreign currency investments are subject to currency fluctuations. Past performance is not a reliable indicator of future performance. Information on peer groups and ratings: Morningstar.

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Strong growth,low correlationThe region encompassing the Middle East, the Arabic countries and parts of North Africa has many of the characteristics that typify emerging markets. For

instance, their economies enjoy much higher growth rates than those of industrialised countries. And this advantage is unlikely to change much in the coming

years. The countries of the Middle East are in a relatively early stage of their economic development, their economies are gradually becoming liberalised, and they have young, growing populations. Equities in the region tend to be attractively valued, enjoy good growth prospects and are an excellent means of diversification.

The correlation between the individual equity markets of the Middle East on the one hand, and the global equity market or global emerging markets on

Schroder iSF Middle East Schroder iSF Frontier Markets Equity

Waking up to Arabian NightsThe Middle East is among the fastest-growing regions in the global economy, and not just because of the oil reserves.

Correlation 2002–2012

Correlation coefficient E

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t

Jord

an

Ku

wa

it

Mo

rocc

o

Om

an

Qat

ar

Sau

di A

rab

ia

UA

E

Le

ba

no

n

Tun

isia

Turk

ey

Oil

(Bre

nt)

S &

P

MS

Ci E

M

MS

Ci W

orl

d

Egypt 1.00

Jordan 0.35 1.00

Kuwait 0.40 0.61 1.00

Morocco 0.28 0.24 0.30 1.00

Oman 0.43 0.47 0.63 0.28 1.00

Qatar 0.37 0.12 0.24 –0.04 0.37 1.00

Saudi Arabia 0.37 0.23 0.33 0.00 0.41 0.50 1.00

UAE 0.26 0.45 0.48 0.06 0.56 0.41 0.45 1.00

Lebanon 0.34 0.48 0.37 0.40 0.47 0.06 0.18 0.17 1.00

Tunisia 0.06 –0.13 –0.08 –0.02 0.13 0.12 0.18 0.03 –0.14 1.00

Turkey 0.37 0.20 0.30 0.12 0.34 0.35 0.26 0.26 0.13 0.27 1.00

Oil (Brent) 0.31 –0.14 0.00 0.01 0.09 0.33 0.26 0.04 –0.08 0.31 0.54 1.00

S & P 0.26 –0.06 0.00 –0.06 0.17 0.44 0.35 0.14 0.07 0.18 0.30 0.32 1.00

MSCi EM 0.26 –0.19 0.02 –0.04 0.12 0.43 0.31 0.09 –0.14 0.36 0.61 0.67 0.48 1.00

MSCi World 0.56 0.20 0.31 0.18 0.37 0.47 0.39 0.22 0.21 0.10 0.69 0.58 0.44 0.69 1.00

Source: Bloomberg. As at 31 December 2012.

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the other, is low, or even negative in some places. For instance, Saudi Arabia has a correlation of 0.39 to the MSCI World, and 0.31 to the MSCI Emerging Markets; and although Saudi Arabia probably has the world’s largest oil reserves, the Saudi stock market has a correlation of only 0.26 to the oil price.1

Schroder ISF Middle East seeks to profit from the positive trends in the region.

Combination of top-down country selection and bottom-up stock-pickingThe fund invests in a portfolio of 30 to 70 stocks selected by means of intensive fundamental research conducted in direct contact with the companies. The fund’s biggest markets are Turkey, Saudi Arabia and Qatar, which make up almost 70% of the fund.2 Along with other countries from the region, they offer plenty of attractive investment opportunities. uuu

1 Source: Bloomberg. As at: 31 December 2012. The country selection is for illustrative purposes only and should not be taken as a recommendation to buy. 2 Source: Schroders. As at: 28 February 2013.

Gas reserves Performance of industries Qatar

Expectedprice/earnings ratio

% growth in earnings per share

Dividend yield in %

Upside potential to fair value in %

10.1 5.0 6.0 +10.0

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Alongside Turkey and Saudi Arabia, Qatar represents one of the biggest country allocations in Schroder iSF Middle East. There are many different reasons for this. First and foremost, Qatar is one of the biggest global producers of liquid natural gas, with an export capacity of 77 million tonnes per year. This represents around 28% of global liquid natural gas.3 In addition, Qatar has the third-largest natural gas reserves, making up 12% of global reserve.

Qatar is also one of the world’s fastest-growing economies. It has a young population, which in 2011 had an average annual per-capita income of around USD 80,000.4 What is more, the FIFA World Cup is due to be held there in 2022, which will lead to big infrastructure projects.

One of the companies favoured by the fund managers – with an analysts’ rating of 1 (see next page for an explanation) – is industries Qatar. Industries Qatar is one of Qatar’s biggest industrial companies, currently employing around 3,000 people. Its activities include steel and fertiliser production, and it is also active in the petrochemical industry. In addition, the company has a 75% holding in one of the world’s biggest producers of urea and ammonia, headquartered in Qatar. Industries Qatar has a share of around 95% in the Qatar steel market and is set to benefit the most from a very strong rise in infrastructure spending in connection with the 2022 FIFA World Cup. Given these prospects, Industries Qatar is one of the fund’s top stocks.

Why Qatar? For example,

3 Source: Schroders. As at: January 2013. 4 Source: World Bank. As at: December 2011.

Source: BP Statistical Review. As at: June 2012.

USD, rebased to 100Cubic meters in trillions % of global reserves

Source: Schroders. As at: December 2012.

n Trillions of cubic metres % of global reserves

Industries Qatar in relation to MSCI Qatar (on a net basis)

40

35

30

25

20

15

10

5

0

16 %

14 %

12 %

10 %

8 %

6 %

4 %

2 %

0 %1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011

150

145

140

135

130

125

120

115

110

105

100

95

90

85

Sep 09 Mar 10 Oct 10 Apr 11 Nov 11 May 12 Dec 12

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Allan Conway (left) and Rami Sidani (right)

Allan Conway is Head of Global Emerging Equities, and is based in London. He is in charge of the fund

together with Rami Sidani, who is Head of the Middle East and North Africa (MENA) Desk and works in Dubai.

Allan Conway has almost 30 years’ investment experience and has been responsible for Schroders’ emerging market equity funds since 2004. Rami Sidani has more than 10 years’ investment experience. He joined Schroders from SHUAA Capital in 2008, and since 2004 has worked as a MENA fund manager. The two fund managers are supported by a team of international analysts in Dubai, Europe, Latin America and Asia.

investment process

Source: Schroders.

The investment team led by Allan Conway, Head of Global Emerging Equities, and Rami Sidani, Head of the Middle East and North Africa Desk in the emerging markets team, takes a very balanced approach to investing in these markets. As a first step, it decides which countries are doing best, based on our proprietary quantitative top-down model. Selecting the right countries is a key decision. The country analyses are based on an internal quantitative model, which also provides the basis for decisions on country weightings. Securities selection is based on thorough fundamental research conducted in-house. The numerous direct contacts at the companies in question play a key role in the research process. The analysts rate each company on a scale of 1 to 4 (1 = “strong buy”, 4 = “strong sell”). In building the portfolio, the fund managers focus on the stocks with the best ratings and as far as possible choose stocks rated 1 and 2. If they believe that a company can grow its value, they also choose stocks rated 3 or 4, but these must then be underweighted in the portfolio.

Usually, little time is devoted to short-term trends in individual markets. This means that there are no particular style preferences – the team simply looks to select good companies that it believes are undervalued. In general, few other professional investors venture into the GME equity markets, and this can lead to short-term price discrepancies. In these cases, the fund management team is able to benefit from Schroders’ in-depth research. In other words, the team can unearth investment opportunities in companies that offer good, sustainable growth prospects but have not yet been discovered by other investors.

The approach is also based on teamwork between analysts in London and Dubai. They are supported in term by investment experts from Schroders’ emerging market equities team, who are based across several countries and frequently exchange ideas. This means that Schroders is very well placed in terms of personnel to cover the GME equity universe.

This mixture of top-down country analysis and bottom-up stock selection finally results in the portfolio. Rigorous risk management and broad diversification ensure minimisation of individual security and country risks. The benchmark index is the MSCI Arabian Markets and Turkey with Saudi Arabia Domestic capped at 20%. The aim of the fund is to outperform this index by 2% annually over a rolling three-year period. uuu

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inputs Portfolio construction

Risk management & implementation

implementation and monitoring of the portfolio

Model portfolio

Schroder iSF Middle East

n Quantitative model with individual country assessment

Country analysis

n Fundamental research

n Stocks rated 1– 4

Equity analysis

n Monthly strategy meetings with the whole team taking part

Country selection

n Fund managers create portfolio based on analysis

Stock selection

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n The Middle East investment region is among the most dynamic and rapidly expanding markets in the world.

n Comparatively little research is available on the region’s companies and equity market: the market is not efficient, so as a result there is great potential for returns.

n Little correlation with other equity markets.

n The combination of top-down country selection and bottom-up stock-picking is promising.


n In order to access restricted markets, the fund may invest in structured products. Should the counterparty default, the value of these structured products may be nil.

n 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.

n Where the fund (or the manager) holds a significant percentage of the shares of one or more companies, it may be difficult to sell those shares quickly. It may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand.

n The Fund will not hedge its market risk in a down cycle.

n The value of the fund will move similarly to the markets. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk.

n Emerging equity markets may be more volatile than equity markets of well established economies.

n Investments into foreign currencies entail exchange risks.

Reasons to invest investment risks

Schroder iSF Middle East

Unit class A, USD, acc. Unit class A, EUR, acc.

ISIN LU0314587907 LU0316459139

Inception 03.09.2007 03.09.2007

Benchmark MSCI Arabian Markets and Turkey with Saudi Arabia Domestic capped at 20%



Fund manager Allan Conway & Rami Sidani

5 Equates to 5.26315% of the net asset value per unit.

Performance – Schroder iSF Middle East; unit class A, USD, acc.

30

20

10

0

–10

–20

– 30

– 40

– 50

– 60

Performance (in %)

09/07 03/08 09/08 03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13

Schroder ISF Middle East

Benchmark Source: Schroders. As at: 28 March 2013.

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The 25 countries in the MSCi Frontier Markets index

How about a little more?Those who find the selection of countries in Schroder ISF Middle East too small, but still wish to profit from the Middle East, should take a look at Schroder ISF Frontier Markets Equity. This fund brings together only the emerging economies of the eastern Mediterranean region and Persian Gulf, but also many other countries, described as “frontier markets”. These are countries whose equity markets are still very small and whose economic development lags far behind that of most emerging countries. Yet they

EuropeCountries Weighting (%)

Bulgaria 0.1

Croatia 2.1

Estonia 0.5

Kazakhstan 3.8

Lithuania 0.2

Romania 1.3

Serbia 0.3

Slovenia 2.0

Ukraine 0.2

Total 10.4

Middle EastCountries Weighting (%)

Bahrain 0.5

Jordan 0.8

Kuwait 24.8

Lebanon 2.3

Oman 3.1

Qatar 15.0

Tunisia 0.7

UAE 10.5

Total 57.7

AfricaCountries Weighting (%)

Kenya 3.2

Mauritius 0.9

Nigeria 14.3

Total 18.4

AsiaCountries Weighting (%)

Bangladesh 2.0

Pakistan 4.0

Sri Lanka 1.6

Vietnam 2.4

Total 18.4

Latin AmericaCountries Weighting (%)

Argentina 3.5

Total 3.5

include some of the world’s most dynamic economies, with great growth potential.

The MSCI Frontier Markets Index is specifically made up of 25 countries in Asia, Africa, Latin America and the Middle East.

The universe can be divided up roughly according to the key growth drivers for the

different economies: the Middle East is using its oil revenues to diversify and become less oil-dependent. Growth in Africa is being helped by the rising influence of China as it builds infrastructure and utility networks and helps to tap into the continent’s mineral wealth. Frontier markets in Asia benefit from emerging markets and manufacturing centres for exports, plus low wage costs. Meanwhile, growth in European frontier markets – all of which are in eastern Europe – is driven predominantly by commodities. Ukraine, for example, is rich in natural

Source: Schroders. As at 31 January 2013.

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Frontier markets are expected to grow significantly faster in the future.

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GDP growth

Source: CITI Investment Research and Analysis. Estimates as at end-January 2013.

resources. It counts as one of the nine countries in Europe classified as frontier markets. The others are Bulgaria, Croatia, Estonia, Kazakhstan, Lithuania, Romania, Serbia and Slovenia.

Together, the frontier markets have a combined GDP of USD 3.251 trillion, which is around 4.4% of global GDP. They account for 12.1% of the global population.6 Wage costs are extremely competitive, and mineral resources are plentiful. In addition,

investors worldwide are underinvested in developing countries, and market liberalisation is speeding up. Yet there are only a small number of funds offering the chance to invest in the growth opportunities that these markets offer. In a global market environment fraught with uncertainty, the low correlation of developing markets with other international markets also opens up significant diversification potential.

6 Source: IMF. World Bank. As at: 30 October 2012.

uuu

Performance – Schroder iSF Frontier Markets Equity, unit class A; USD; acc.

15

10

5

0

–5

–10

–15

–20

–25

Performance (in %)

12/10 03/11 06/11 09/11 12/11 03/12 06/12 09/12 12/12 03/13

Schroder ISF Frontier Markets Equity Benchmark Source: Schroders. As at: 28 March 2013

Differences in GDP growth of frontier markets, emerging countries and industrialised countries (forecasts)GDP growth p.a.

7%

6%

5%

4%

3%

2%

1%

0%2012 2012 – 2021 2022 – 2031 2032 – 2041 2042 – 2051

n Frontier markets n Emerging markets n Industrialised countries

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Schroder ISF Frontier Markets Equity seeks to profit from the many investment opportunities offered by frontier markets.

The portfolio is created by a balance of country allocation and stock-picking as part of a disciplined, systematic process. The fund aims to generate 50% of its capital growth from country selection and 50% from the selection of individual securities.

Country selection is based on a quantitative process that combines our proprietary model for global emerging markets and developing countries with our

n The investment region is among the most dynamic and rapidly expanding markets in the world.

n Comparatively little research is available on the region’s companies and equity market: the market is not efficient, so as a result there is great potential for returns.

n Little correlation with other equity markets.

n The combination of top-down country selection and bottom-up stock-picking is promising.


n In order to access restricted markets, the fund may invest in structured products. Should the counterparty default, the value of these structured products may be nil.


n Where the fund (or the manager) holds a significant percentage of the shares of one or more companies, it may be difficult to sell those shares quickly. It may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand.

n Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand.


n The value of the fund will move similarly to the markets.

n Emerging markets will generally be subject to greater political, legal, counterparty and operational risk.

Reasons to invest investment risks

Schroder iSF Frontier Markets Equity

Unit class A, USD, acc.

ISIN LU0562313402

Inception 15.12.2010

Benchmark MSCI Frontier Markets



Performance fee 15% of the fund’s outperformance versus the benchmark MSCI Frontier Markets, following the high water mark principle.

Fund manager Allan Conway & Rami Sidani

in-depth equity research conducted by in-house analysts. The fund management team led by Allan Conway and Rami Sidani uses strict, active risk controls, including stop loss rules.7

The fund does not follow any specific investment style, as the frontier markets are very different. As a result, managers can invest wherever they see the best growth and value potential. The addition of developing markets to a global equity portfolio can increase returns while at the same time reducing risk potential.

7 In volatile market phases, it may happen that we temporarily suspend these stop-loss orders.

8 Equates to 5.26315% of the net asset value per unit.

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What was your first really formative experience of money?I was just 18 when I first traded on the markets. This is when I learned that leverage combined with ignorance can result in dire consequences. It was a very good lesson at a young age.

How did you pay your way through university?I was lucky to have a family capable and willing to finance my education. I am very grateful to them. And I would do the same for my kids – I think education is one of the most important weapons I can provide them with to face life’s challenges.

Do you have a professional role model?Like many investors, I admire Warren Buffet. The lesson he’s taught me is not to worry about short-term fluctuations but stick to your beliefs. Quality prevails with time, and all things return to their proper place. This, in my view, applies to almost everything in life, not just stocks and investments.

What’s the most ridiculous stock market saying you’ve ever come across?“The trend is your friend” – I do not believe in technical analysis. Relying on charts is like driving a car while looking in

the rear view mirror all the time. Only fundamental analysis allows investors to identify the right businesses to invest in.

Who would you most like to give a piece of your mind?I must say, I take pride in the fact that I’m a very composed person and rarely really lose it. But I do have very little tolerance for people who constantly over-promise and then under-deliver or deliver nothing.

Which book is a must for every fund manager?“Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” by Nassim Nicholas Taleb. The book shows how easy it is for fund managers to perform well when times are good – which is exactly why many get so deluded about their abilities. The book is brutally honest and shows how fund managers try to rationalise randomness and delude themselves that it’s skill rather than chance.

Where do you find the motivation if your fund is underperforming the competition, and what do you do when you are doing better?I am by nature a constant worrier, and if I underperform I worry even more. But I’m usually proven right in the end – and it’s this feeling that keeps me motivated. And

it’s exactly the same feeling that drives me on if I’m ever wrong. The most important thing in the game of investing is to stay in the game!

And what’s your reward for leaving all the others trailing behind?The best reward is the satisfaction and affirmation that I was right and that this was why I outperformed the market and my peers. This is when you know you are ahead of all the others and that you are the best at what you do.

What are you proud of?I have many things to be proud of, thankfully. I am proud of being part of Schroders, and especially proud of being part of the Emerging Markets team. Investing in the dynamic frontier universe makes me feel a bit like I’m part of their history. These markets and nations are climbing the evolution ladder ever faster and developing so quickly that the asset class is ending up on the radar of global investors.

What has made you really angry recently?As I also invest in Africa, I see the great potential this continent offers, but unfortunately the poverty and corruption in these nations continue to increase.

QUESTiONS TO RAMi SiDANi

Funds


Rami Sidani, Fund manager of Schroder ISF Middle East and Schroder ISF Frontier Markets Equity

Do you collect anything?I collect matches from every place I go. I started in my early 20s and now have a massive collection. Picking up a box of matches immediately takes me back to places I’ve been, which usually have great memories. This feeling is a reminder to visit new cities and countries and collect more memories to savour.

What was the last product you sold on eBay?I have never bought or sold anything on eBay.

Facebook is……the greatest evidence that providing a platform for connecting people can be worth USD 100 billion.

What is your favourite TV series?I love Boston Legal. I’ve always been fascinated by the legal world and how mere words, if put together eloquently, are able to swing a court’s verdict. I also find the dialogue in the series quite witty.

And what makes you switch off straight away?“Keeping up with the Kardashians”. It is, without a doubt, the ultimate proof of how our society is dumbing down.

Which do you prefer: a football game or rock music?I prefer to watch football, as it’s always been a hobby. I have enjoyed playing football since I was a kid. I still play when I have the time. To be honest, rock concerts are too loud for me – or maybe it’s just that I’m already too old for them.

What was the last game you went to?The last game I watched was El Classico: Real Madrid against Barcelona. The Spanish league has immensely talented players. But I must admit that I’ve been an Argentina fan since I was six – I love watching Messi play.

What fashion crime are you most willing to forgive yourself and others?I am not part of the fashion police – and I prefer comfortable clothes.

Do you prefer beer or wine with a meal?I’m not necessarily a beer fan – a glass of red wine with a good steak is more my thing.

What luxury item would you have trouble giving up?I would definitely not be able to live without great food. It’s one of my greatest pleasures. I live to eat, not eat to live.

Where would you like to live if you were no longer a fund manager?I would be living by the sea... managing my own fund.

Did you know that .. .

. . . when Bismarck introduced statutory pension insurance in Germany in 1891, average life expectancy was five years below the actual age of retirement (65 vs. 70 years)? Source: German pension insurance scheme 2012.

. . . there are around a quarter of a billion people in industrialised countries with an unnatural gap in their teeth? Source: Schroders Demographics Newsletter. As at:

Jan. 2013.

. . . insulin will be the most-needed medicine in the world in 20 years’ time? Source: World Health Report. As at: 2011.

. . . just 3 in 1,800 hospitals in Thailand meet European standards? Source: Schroders Demographics Newsletter. As at:

Jan. 2013.

Lars K. Jelgren, Head of intermediary Sales, Nordic, and in 30 years’ time

. . . Nokia sold over 6 million smartphones worldwide last year? However, the total market was over 220 million smartphones. Source: Nokia 2013.

. . . China Mobile gains around 70 million clients every year (T-Mobile had a total of around 35 million clients in 2011)? Quelle: China Mobile, Schroders, T-Mobile. Stand Dez. 2012.

. . . the German government held the first Demographic Summit in October 2012? There are now plans to hold one every year and to use the event to set the strategy for tackling demographic change (the slogan “Every age counts” has been chosen). Source: www.bundesfinanzministerium.de/Demografiegipfel.

Funds


JO’S DEMOGr ApHIC COrNEr

32

Almost 300 equity funds outperformed with demographic change!

Schroder iSF Global Demographic Opportunities

Unit class A,USD,acc.

Unit class A,EUR hedged,acc.

Unit class A,EUR hedged,dist.

ISIN LU0557290698 LU0557291076 LU0671501046

Inception 23.11.2010 23.11.2010 21.09.2011

Distribution quarterly

Benchmark MSCI All Countries World TR Net



Fund manager Charles Somers

1 Equates to 5.26315% of net asset value per unit.

Charles Somers, fund manager

You are probably wondering what this has to do with demographics. Across the globe, countless shifts, changes and developments are taking

place – many of these trends result from demographic change and provide us as investors with exceptional investment opportunities. David Foot, one of the world’s best known futurists, summarised this situation as follows: “More than 70% of what will happen on this planet in the future will be the result of demographic change.”

Our demographics investment team, led by fund manager Charles Somers, analyses and researches future developments, transforming their findings into successful investment ideas. The team focuses on core themes such as healthcare, pensions/finance, energy, infrastructure and consumption. The result is Schroder ISF Global Demographic Opportunities, launched in 2010, which continues to be strong proof that demographic funds are more than just a marketing ploy. The global equity fund, whose strategy is to

exploit global change, came first in a large peer group of around 300 equity funds ranked by Morningstar.

Incorporating the reality of long-term social change in a fund like ours is particularly appealing to long-

term investors. The fact that Schroder ISF Global Demographic Opportunities has already been included for selection in several unit-linked

life insurance schemes is no mere chance. The theme of demographic change is clearly attracting increasing interest. If your interest has also been awoken and you would like to know more about this megatrend, please get in touch with your contact person at Schroders – we’re here to help you.

Until next time!

Joachim Nareike

“More than 70% of what will happen on this planet in the future will be the result of demographic change.”

Funds


Jo’S DEMoGr ApHIC CorNEr

33

Schroder iSF Global Demographic Opportunities

Category Ranking

Global equities: growth barometer stocks 1 / 286

Global equities: currency hedged 2 / 153Source: Morningstar. As at: 4 March 2013.

n Schroder ISF Global Demographic Opportunities invests worldwide in companies with potential to benefit from the impact of demographic change on the world economy.

n The fund exploits a long-term trend which finds little resonance in conventional consensus forecasts.

n The fund provides return opportunities by investing in a concentrated equity portfolio of around 40 to 60 individual equities, which are selected without reference to a benchmark. The fund may also invest in small caps.

n The fund managers follow a disciplined and active investment process with integrated risk management.

n A EUR-hedged unit class is offered.




n The value of the fund will move similarly to the markets.

n Emerging markets will generally be subject to greater political, legal, counterparty and operational risk.

investment opportunities investment risks


MARKETS

UK The British economy has suffered badly from the effects of weak growth in the eurozone

and is still very strained. The FTSE 100 companies continue to be less exposed to the domestic economy, plus they are very defensively positioned. But the weak pound and the Bank of England’s ongoing quantitative easing are providing support for the market.

Schroder iSF UK Equity

Market snapshotEquities

US Despite some concerns, we remain

optimistic about the US given the recovery in the real estate market and increased spending by the private sector. In addition, the banking sector is improving in health and making a positive contribution to the economic recovery.

Schroder iSF US Small & Mid-Cap Equity

Japan We are now somewhat more positive about Japan. There are signs

that the weak yen is leading to rising profits. Moreover, the Japanese central bank appears to be continuing with expansionary monetary policy measures and has given no signs of changing course in the near future.

Schroder iSF Japanese Equity Alpha

Emerging markets Looking at the investment universe as a whole, emerging market valuations are no longer quite so convincing compared

with industrialised countries. Growth prospects present a very mixed picture overall. On one side are the ailing heavyweights, such as Brazil, India and Russia. On the other side is China, which seems to be making a strong comeback, although further restrictions on the property market have recently been announced. Nevertheless, emerging markets such as China and Brazil are showing increasing signs of stabilisation.

Schroder iSF Global Emerging Market Opportunities

Europe (ex UK) Given the recent events in

Cyprus and the Italian elections, the deep political and economic uncertainty in this part of the world persists. Austerity measures are still acting as an additional brake on the region’s growth.

Schroder iSF EURO Equity


MARKETS

Expected performance:

Positive Neutral Negative

Allocation Change since Q4/2012

Positive factors Negative factors

Cash/near-money Underweight Unchanged Diversification; liquidity Interest rates less than zero

Government bonds industrialised countries

Underweight Unchanged Diversification, slowdown in global growth, continued monetary loosening growth

Valuations not particularly attractive, slow improvement only in global continued monetary loosening growth

Bonds emerging markets

Overweight Unchanged Attractive carry Tightening of financial policy by some central banks

Equities industrialised countries

Overweight Unchanged Valuations; political actions by central banks

Profits, geopolitical risks

Commodities Neutral Unchanged Political actions by central banks Subdued global growth, fall in demand in emerging markets

High-yield bonds Overweight Unchanged Healthy balance sheets, company finances in good condition

Weak growth prospects

The valuations of the asset classes described do not refer to particular fund portfolios and should not be considered as a recommendation or advice.

Government bonds We remain underweight in

government bonds of developed countries. Central bank monetary measures have already been largely factored in and very low returns are also making government bonds less attractive for risk-averse investors. We remain negative on German bunds and US Treasuries. Despite the political uncertainty in Italy and current events in Cyprus, we have maintained our underweighting in German bunds at the long end of the yield curve. Over the medium term, we believe that the slow recovery of the global economy will lead to a normalisation of investment behaviour: investors will move from safe asset classes to slightly riskier ones.

Schroder iSF US Dollar Bond

Emerging market bonds Many emerging market economies

are in better financial shape than their industrialised counterparts. For example, Thai and Philippine government bonds have recently been upgraded by rating agencies. From a valuation perspective, emerging market bonds are currently being traded at fair value compared with the last 10 years.

Schroder iSF Emerging Europe Debt Absolute Return

Corporate bonds The spreads between US and

European corporate bonds have been very wide recently owing to increasing concerns over Cyprus. From a short-term valuation perspective, spreads remain very expensive. In view of macroeconomic developments, the fundamentals remain stable and the asset class will support investors seeking first-class returns.

Schroder iSF Global Corporate Bond

High-yield bonds We are very positive about this asset

class, which remains attractive even though spreads have shrunk in recent months. Nevertheless, we are highly vigilant and conscious of the need to spot any early signs of a trend reversal.

Schroder iSF Global High Yield

index-linked bonds The current environment of low

growth and historically low interest rates is advantageous for inflation-linked bonds. But valuations are not really inspiring and the break-even inflation rates are rather expensive, which is why we take a neutral position.

Schroder iSF Global inflation Linked Bond

Commodities As in the last two quarters, we are

maintaining our neutral positioning. We remain negative on industrial metals owing to slowing growth in China and the difficulties in the construction sector. We have scaled back our overweighting in the energy sector to neutral, as supply and demand are becoming increasingly balanced. We expect only very slow growth in oil demand as the global economy is moving forward at a fairly slow pace. We remain neutral on agricultural commodities. Although prices are likely to fall gradually, there is still a risk of price increases owing to the low reserves.

Schroder iSF Global Resources Equity

Real estate International and domestic investors

will continue to look for investment opportunities in London, and the fundamental data there are currently attractive. We anticipate an increase in rentals of London office space from 2014, which is sure to lead to profits for investors. But we also expect to see increased long-term interest in office space outside London too, with cities such as Munich, Stockholm and Vienna also experiencing a recovery.

Schroder iSF Global Property Securities

Bonds Alternative investments

Data from the International Monetary Fund clearly show how rapidly this catch-up process is taking place: in terms of gross

domestic product (PPP), China and India are already ranked in second and third place behind the US, while Germany has fallen to fifth place. And Germany has also lost its unofficial title of “export world champion” to China. Some observers believe that the progress made by Asian countries is just restoring the normal state of affairs. In the last millennium, China and India were in fact the dominant economic powers for most of the time – it is only in the past 200 years that this picture has become skewed in favour of the West.

The past two years have shown that there can be no recovery without setbacks. Economic growth in both China and India has slowed somewhat recently, but

momentum remains high: the two countries still grew by 7.8% and 4.0% respectively in 2012. And indicators are pointing to a recovery, particularly in China. The most recent economic data suggest that the Chinese economy has bottomed out. The change in political leadership has been a source of new

optimism. The dragon has had a soft landing. But there has long been more to Asia than just China and India: south-east Asian countries, such as the Philippines, Thailand and Indonesia, have developed rapidly in their slipstream.

Previously known for political unrest and as the epitome of inadequate fiscal discipline, these countries have achieved political stability, improved their investment climate and strengthened their economic fundamentals even further. Thailand is also benefiting from increasing investment by

“There is more to Asia than just China and India.”


MARKETS

Anyone seeking growth should look beyond western industrialised countries: last year, the US grew by just over 2%, and the economy of the eurozone even contracted slightly. In Asia, in contrast, the economy is booming, which is also reflected in share prices: last year, the MSCI AC Asia ex Japan index, which tracks Asian markets, gained an impressive 22.7%. The Asian countries are outdoing the West.

Asia rushes to catch up

Figure 1: Consumption in Asia (ex Japan) in relation to US consumption (in %)

Japanese companies, which are no longer welcome in China on account of the recent tensions between the two countries.

At the same time, the potential for growth in south-east Asia is significant because there has been limited investment since the Asian crisis in 1997 and 1998. As a result, the state of infrastructure is poor - and there is consequently a considerable need to catch up. The low interest rate environment is also contributing to this trend, so we are experiencing a veritable boom here based on a self-sustaining credit cycle.

Besides exports, growth in Asia is primarily driven by domestic consumption, and this has also has risen significantly due to increasing urbanisation: Asian cities grew by a total of one billion additional residents between 1980 and 2010, with a growing number of the rural poor moving to urban areas and finding work. This migration has led to a huge increase in average incomes, and the Asian middle classes have grown steadily. These people are spending their extra money on consumer goods in particular – which, in turn, benefits the domestic economy.

Compared with consumption in the US, the region has been experiencing steady growth for more than a decade. A range of sectors is benefiting from this growing consumer trend, such as companies from the consumer goods and consumer discretionary goods sectors that deliver products connected with a higher standard of living, from cars to electronic

consumer goods. This trend will continue: the Asian

Development Bank (ADB) expects that more than 55% of all Asians will live in cities by 2030.

In addition, households in Asian countries are known for their high

savings rate – in contrast to their counterparts in western industrialised nations – which means that private levels of debt are relatively low in these countries. The increasing availability of credit will therefore provide an additional boost to this steady upward trend in consumer spending.

Nevertheless, we at Schroders have reservations about the quality of Chinese loans and are consequently maintaining a relatively limited exposure to this segment in our portfolio. The economy is increasingly dependent on high credit growth, both within and – which is more troubling – outside the official banking system.

Figure 2: indebtedness of private households as a percentage of GDP in Asia

“The pace of population growth in Asian cities will not slow for the time being.”


MARKETS

55

51

47

43

39

35

31

27

23

UK

US

Korea

Eurozone

Taiwan

Malaysia

Hong Kong

Singapore

China

Thailand

Indonesia

India

Philippines

99 0 20 40 60 80 100 12000 01 02 03 04 05 06 07 08 09 10 11

Data from Q1 2012 for the eurozone, Korea, the US and the UK, data for India for FY 2011.

Source: CEIC, Haver, Morgan Stanley. As at: September 2012.

These loans are increasingly being used to finance extensive government projects with questionable future viability. Although growth in China continues to be based primarily on high levels of investment, there is currently an open debate among Chinese leaders about economic reform. If such a reform were to be successful in the long term, it would open up investment opportunities in segments such as value-added manufacturing, consumer services, healthcare, media, technology and special financial services.

In addition, Asian governments have the option of implementing monetary and fiscal measures in response to short-term volatility in the markets (see figure 3). Although the massive stimulus measures of 2009 will not be repeated in China, the traditional budgetary discipline that is often associated with Asian countries allows flexibility in uncertain times. For instance, the minimum wage has already been raised this year in countries such as Thailand and Indonesia, which is likely to support domestic consumption in the future. Increasing wages in China have provided the population with more purchasing power.

And while the euro crisis continues to smoulder and the US groans under its mountain of debt, Asia’s financial crisis is already in the past: the Asian crisis at the end of the 1990s progressed in a similar way to what we are now experiencing in western industrialised nations. Asian countries, and

particularly the companies based there, have learned from their mistakes and have become considerably more resilient than the West.

Yet despite these positive signs, Asia is not a homogeneous region; its countries are taking different paths and

there is always a possibility of them stumbling into short-term crises. Good diversification is therefore just as important as selective stock picking: investors need to scrutinise companies carefully and focus on criteria such as sound corporate governance, robust cash flow and healthy balance sheets. That will make a foray into Asia worthwhile. And Schroders is the perfect guide. Schroders’ Asia funds are in the first or second quartile for the current year and over three and five years.

They are showing once again that with a motivated, experienced and well-trained team, investment

“Schroders is one of the top ten asset managers in the Asian market.”


MARKETS

Figure 3: Several countries still have fiscal policy leeway

Source: CEIC, Morgan Stanley Research. As at: January 2013.

0 10 20 30 40 50 60 70 80

n Sovereign debt, as a percentage of GDP

India

Malaysia

Thailand

Taiwan

China

Korea

Indonesia

Hong Kong


MARKETS

opportunities can still be found despite the difficult times that sometimes occur in Asia. Schroders’ local expertise and track record of success are clearly in evidence even in Asia itself. According to the latest data from Cerulli Associates, Schroders is one of the top ten asset managers in the Asian market and is also the largest foreign asset manager.

Top 10: Asian “Long-Term Mutual Fund Managers” based on assets under management (AuM), December 2012

Ranking Manager AuM(USD billion)

% change in AuM compared with the

previous month

Market share

1 Daiwa Securities Group 62.1 –3.0% +4.9%

2 Mitsubishi UFJ Financial Group 46.2 –2.2% +3.7%

3 Nomura Holdings 41.9 +0.3% +3.3%

4 Vanguard Group 34.2 +1.1% +2.7%

5 Schroders 30.9 +3.4% +2.5%

6 Fidelity 26.8 +0.6% +2.1%

7 BlackRock 26.3 –1.0% +2.1%

8 J.P. Morgan Asset Management 24.4 –4.0% +1.9%

9 China Asset Management 22.7 +3.5% +1.8%

10 Nikko Asset Management 21.7 +9.2% +1.7%

Source: Cerulli Associates

“For a revolution to succeed, the government must appear so irredeemably unjust or inept that it is widely viewed as a threat to the country’s future; elites (especially in the military) must be alienated from the state and no longer willing to defend it; a broad-based section of the population, spanning ethnic and religious groups and socioeconomic classes, must mobilize; and international powers must either refuse to step in to defend the government or constrain it from using maximum force to defend itself.”

Jack Goldenstone

SPECIAL FEATURE

There has not been a period of comparable uncertainty and upheaval in the Middle East since 1979. 34 years ago, the Iranian revolution

culminated in the overthrow of the Shah’s regime, which had been a predictable factor in the region for the West. Two regional wars followed – the Iran-Iraq war and the civil war in Lebanon – in the midst of a very unstable period when even the Grand Mosque in Mecca was occupied. Some people believed that a revolution was also imminent in Saudi Arabia. Sir William Patey believes the events of the last 18 months in the Middle East are of a similar importance to the developments of 1979.

Patey explains that the four factors mentioned in the quote from Jack Goldenstone played a role in all of the countries of the Arab Spring. At the same time, he believes the international dimension is the reason why the Syrian regime has not yet been overthrown (along with the military’s continued support for the Syrian ruler). Assad knows very well that he cannot exceed a certain threshold of violence against the Syrian people; otherwise he faces the threat of international intervention. The use of chemical weapons, for example, would be a profound game changer – but the international community continues to tolerate the extent of the violence to date.

Will the spark of the Arab Spring now ignite in the Gulf states?“If you include the Gulf states in this analysis, it becomes clear why the Arab Spring did not attract broad support there – which does not mean that it will not happen someday,” says Patey. One requirement for the survival and future success of the

Gulf states is the creation of a business and investor-friendly environment to meet the demands of their growing and increasingly younger population. While political power remains concentrated in the hands of a chosen few, this elite ensures that economic power is widespread, in contrast to the military dictatorships in the countries of the Arab Spring. In addition, the monarchies of the

Gulf states enjoy more social and cultural prestige among large sections of the population, which legitimises their claim to power. The idea that monarchies are more legitimate may appear contradictory, but in contrast to the military dictatorships, they did not revolt their way to power by overthrowing a corrupt government “on behalf of the people”.

The unrest also spread to Bahrain, among other countries, where it was violently suppressed by the local government. Patey believes that due to the small size of Bahrain, the West was able to exert diplomatic pressure and demand reforms.

“It is not yet clear whether the Arab Spring will lead to a form of democracy that is an improvement compared with the old regimes.”

The Arab Spring, the Gulf states and iran: where is the Middle East headed?

investors know only too well that turbulence in the Middle East can have global ramifications. Schroders asked Sir William Patey and Peter Jenkins, two of the world’s most prominent experts on the region, for their views on and answers to today’s most pressing issues.

Sir William Patey and Peter Jenkins

Sir William Patey Peter Jenkins


SPECIAL FEATURE

The approach towards the large Gulf states might have been more restrained. Furthermore, the West continues to have a significant interest in the stability and security of the region.

Economic power creates stability“Of course it is helpful if you can pump USD 130 billion into the economy if you feel threatened,” says Patey. The countries of the Gulf Cooperation Council (GCC) will probably earn more money with their oil exports between 2010 and 2014 than they did in the 15 previous years. In less than a decade, Saudi Arabia’s sovereign debt will have fallen from 100% of GDP to below 5%, while the non-oil sector has grown every year by 8%. “The key point is that they are still able to keep the population in line – there will not be any bread riots in the Gulf States,” says Patey.

Should Saudi Arabia fall, this would have stronger repercussions on the other countries in the region than vice versa.Despite Saudi Arabia’s enviable economic situation, Patey warns against jumping to conclusions. “Saudi Arabia has an aging monarchy, and there is a clear lack of employment opportunities for young people,” he points out. If the cause of the Arab Spring was that the impacted countries were no longer able to satisfy the demands of the ever-growing young population, Patey expects there will be similar issues in the Gulf states. The population in the GCC countries will probably double in the next 30 years, and already today every second person is younger than 25.

One major problem for the Saudis is managing the succession to the throne. Since the death of King Abdul-Aziz in 1953, the throne has passed to several of his 44 sons, ensuring a certain amount of stability. But this line is gradually dying out, and there is no clear candidate among his grandchildren. As King Abdullah is nearly 90 years old, Patey expects there will be a change in leadership in the next few years. In 2006, King Abdullah established the “Allegiance Council”, a body consisting of the sons and grandchildren of the founder of Saudi Arabia, King Abdul-Aziz, which elects the future kings and crown princes in a secret ballot. According to Patey, Prince Mohammed bin Nayef is an important contender to the throne based on his appointment as interior minister.

Potential threats for Saudi Arabia?There will not be a military coup, however. “That would require a conspiracy between different sections of the armed forces, which is virtually inconceivable,” says Patey. An Islamic revolution did not succeed back in 2002-2005, when the country was threatened by Islamic terrorists. Patey therefore thinks it unlikely that such a revolution would be

successful today, and also believes that a popular uprising is improbable. “The biggest danger for Saudi Arabia is internal family feuds,” he says. But even though the situation today is more difficult for the ruling family than it was previously, he rules out the possibility of them being overthrown for the time being, and expects the Al Sauds will remain in power. “The Saudis have a hard time with reforms, but if they feel threatened, they can be very determined,” he explains.

“In less than a decade, Saudi Arabia’s sovereign debt will have fallen from 100% of GDP to below 5%, while the non-oil sector has grown every year by 8%.”

“In my opinion, the threat of military action in the Middle East has always been far more effective than its actual use”

Sir William Patey

was the British Ambassador to Afghanistan until April 2012. He led the UK’s diplomatic mission in Kabul from the start of the military intervention through to the steady withdrawal of British troops, before responsibility for security was transferred to the Afghan forces. Sir William has also served as Ambassador to Saudi Arabia, Iraq and Sudan. He headed the Middle East division in the British Foreign Office before being appointed as Ambassador to Sudan. At this time, the government in

Khartoum and the rebels in South Sudan (SPLA) were negotiating a comprehensive peace agreement. When the new Iraqi constitution was drafted and approved in a referendum, he was the British ambassador in Iraq. He also served as a diplomatic envoy in Tripoli, Abu Dhabi and Canberra and worked for the Libya/Syria and Iran/Iraq departments in the British Foreign Office and as deputy director of the UN department.


SPECIAL FEATURE

The rise of the islamistsMany feared that the Arab Spring would lead to an Islamic Fall. “Of course, the downfall of the autocratic regimes in North Africa fuelled fears of tribal conflicts and sectarian violence,” says Patey. The Islamists have certainly achieved important electoral victories, but they have not prevailed in every case. In Libya, for example, they received just 10% of the vote, while in Tunisia, they were forced to join a coalition. In Egypt, too, where the Muslim Brotherhood has assumed power, they must now demonstrate they can govern. According to Patey, they must also satisfy the demands of the young population now they are in government.

No clear US strategy in the regionPrior to the US presidential elections, an element of procrastination was the order of the day, but Patey is concerned that this “political trend” could become the norm. He quotes the former Prime Minister Lord Salisbury, who described British foreign policy in the 19th century as the art of floating “lazily down-stream, occasionally putting out a diplomatic boat-hook to avoid collisions”. In terms of the Middle East, this means that the US is only trying to avoid conflicts and is avoiding committing itself as far as possible.

Patey believes the US considers the Arab Spring to be an internal regional process, which is perhaps because the recent campaigns in Iraq and Afghanistan

have demonstrated the limits to US military power. “In my opinion, the threat of military action in the Middle East has always been far more effective than its actual use,” he says.

The impact of shale gasThe shale gas deal in the US is causing concern in the Gulf states. “The Saudis have always been afraid that their strategic relationship with the US would suffer if the US became energy-independent,” says Patey. “But even if this were to become a reality, that is not the US’s only interest in the region. The price of oil will also continue to play an important role in the future because it has a direct impact on the US economy,” he adds. In the long run, Patey believes some people in the US will question why the Strait of Hormuz is defended when the oil is mostly delivered to China. China could come under pressure to bear part of the burden, but on the other hand, perhaps it does so already. “The USS Dwight D. Eisenhower ensures that the waterways in the Gulf remain open so that oil can be transported to China. In return, China buys as many US Treasuries as possible so that the US can pay for the deployment of the Eisenhower in the Gulf!” jokes Patey.


SPECIAL FEATURE

“From the perspective of the Iranian government, there are persuasive arguments for the view that developing nuclear weapons is very risky,” says Jenkins. President Obama has made it unmistakably clear that although he is willing to accept Iran as a “nuclear threshold state,” he would not tolerate a nuclear-armed Iran. In Jenkins’ view, the leadership elite in Iran knows very well that the danger of an invasion would increase dramatically if this threshold were crossed. In addition, the country would lose its remaining friends among the non-aligned states and jeopardise its relationships with Russia and China, as it has assured these countries it will not build nuclear weapons. “Iran is not a genuine rogue state – it definitely places some importance on maintaining good relations,” says Jenkins. But, he adds, caution is necessary. It is possible, although improbable, that Iran has secret facilities for enriching uranium. At the moment, however, Jenkins believes it is highly unlikely that Iran is working on the development of nuclear weapons.

is a military strike against iran’s nuclear facilities likely in 2013?As there is no evidence that Iran has nuclear weapons or is working to develop them, Jenkins feels there is not much likelihood of an attack. He doubts that the US is interested in pursuing another conflict in the Middle East. “Politicians know there would be little support among the population for an invasion, and the administration understands that an attack on Iran could have enormous economic consequences,” he says. In addition, there is a very real danger of Iranian retaliation against Israel or Saudi Arabia.

What are iran’s nuclear intentions?“I am optimistic on this,” says Jenkins. He says that when this issue was discussed for the first time in 2003, all participants were convinced that Iran intended to develop nuclear weapons. Iran had withheld information from the IAEA and had performed research on both military-grade nuclear material and the associated weapons technology.

But at the end of 2007, a US intelligence report came to the conclusion that Iran had stopped working on its nuclear weapons programme at the end of

2003. And even if the programme had been partially restarted in the meantime, there was no evidence that the Iranian leadership had actually decided to develop nuclear weapons. The report actually concluded that Iran was only

aspiring to develop the capacity to build nuclear devices. Jenkins therefore believes that Iran is probably attempting to become a “nuclear threshold state” and has no aspirations to achieve the status of a “nuclear weapons state.” The US report also pointed out that the Iranian government acts in a “rational” manner.

“It is highly unlikely that Iran is currently working on the development of nuclear weapons.”

Peter Jenkins

combines 33 years of experience in international diplomacy with in-depth knowledge of the interactions of nuclear technology. At the same time, he has a keen sense of the objectives that Iran, Israel and the US are pursuing in the nuclear dispute. He has been on assignment twice in Vienna, most recently as British Ambassador to the UN. In both cases, he dealt primarily with international nuclear policy. Most recently, he served as the UK’s Permanent Representative to the International

Atomic Energy Agency (IAEA) and the United Nations in Vienna. In this capacity, he worked on the drafting of the IAEA Treaty on the Non-Proliferation of Nuclear Weapons. He was also President of the 2007 IAEA conference on illicit trafficking in nuclear materials and served as Deputy Chairman of the ad hoc committee for the drafting of a UN convention against corruption. He is an associate fellow at the Geneva Centre for Security Policy.

Since his retirement from the diplomatic service, Peter Jenkins has made a name for himself with his rational counterproposal to the generally accepted certainties in the West about how to solve the nuclear dispute with Iran. This also applies to his objective observations about the consequences of the diplomatic positions of all participants in the nuclear dispute. Peter Jenkins spoke with Schroders about his assessment of the risks in 2013.


SPECIAL FEATURE

Please note: The views and opinions in this article are those of Sir William Patey and Peter Jenkins, and do not necessarily reflect the views and opinions of Schroders.

Furthermore, Jenkins believes that Israel would probably not attack Iran single-handedly. Israel knows that both the US and its NATO partners are against an attack, and without US help, Israel would not be in a position to carry out a successful military strike. “An attack on Iran’s nuclear facilities would be a clear violation of the UN Charter,” adds Jenkins.

is a diplomatic resolution of the nuclear dispute possible this year?“The US would like to resolve this conflict,” says Jenkins. The Iranians also probably have a significant interest in a resolution, because their economy is suffering under the sanctions that have been imposed. Added to this is the fact that the opponents of a negotiated solution, i.e. Netanyahu and his neo-conservative allies in Washington, have been weakened politically (the Republicans lost the elections and failed to prevent Chuck Hagel from being appointed as the new Secretary of Defense in the Obama administration – although Hagel must still be officially confirmed).

Nevertheless, Jenkins points out that Iran’s supreme leader – the man who makes the final decision in this case – still deeply mistrusts the US. In addition, it is incredibly difficult to set a date for the resumption of negotiations. “Although the general outline of an agreement has already been clarified (in the Nuclear Non-Proliferation Treaty), the likelihood of an agreement in the near future is unfortunately small,” says Jenkins.

Will there be a nuclear arms race in the Middle East?“In short, no,” says Jenkins, adding: “As long as Iran does not cross the threshold.” In his view, the danger of a nuclear arms race in the Middle East has been grossly exaggerated. All the other participants (Saudi Arabia, Egypt and Turkey) are adhering to the Nuclear Non-Proliferation Treaty. Jenkins also feels that neither the US nor the Israelis would stand idly by in the event of a nuclear arms race. Such a race would also require personnel resources that are thin on the ground in the region. He recalls a conversation he had with the Turkish Ambassador, who pointed out that Turkey lived for 60 years next to the nuclear-armed Soviet Union. So why should it arm itself with nuclear weapons now, just because of Iran? The Ambassador also emphasised that Turkey is protected by the NATO nuclear umbrella.

Sir William Patey interjects: “Saudi Arabia’s own perspective is probably that it already has nuclear weapons – they just happen to be stored in Pakistan.” Although this is a tongue-in-cheek remark, Patey does in fact believe that Saudi Arabia has reached an understanding with the Pakistani military.

“It is often claimed in Israel that Iran is ruled by “crazy mullahs”. But that is not the opinion of the US intelligence agency.”

“Iran is not a genuine rogue state – it definitely places some importance on maintaining good relations.”


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Schroder Property offers its clients a broad portfolio of pan-European real estate products such as open-

end and closed-end real estate funds, special funds and funds of funds, listed REITS and real estate equity funds. The funds invest both directly and indirectly, with varying risk-return profiles and are diversified by regions and sectors.

The investment philosophy of Schroder Property, like that of Schroder Investment, is highly research-driven and based on the conviction that the real

estate market is imperfect and subject to market cycles. Comprehensive analyses and detailed investigations of the various real estate markets make it possible to identify investment alternatives and find value potential, creating opportunities to outperform the market.

Overall, the economic forecasts for Europe have stabilised somewhat in recent months thanks to the ECB’s government bond-buying programme and the EU’s decision to establish a pan-European banking regulator. Even

European “concrete gold”By Mark Callender,Head of Property Research,Schroders

Did you know that. . .

... Schroders also has a property division and has been active in the real estate business since 1971?

The Property team comprises around 100 employees, based in nine offices across Europe. The team has access to various central areas of the company with around 2,900 employees worldwide.


SPECIAL FEATURE

though the short-term economic outlook for Europe is still weak, fears of a breakup of the eurozone have receded somewhat.

With that in mind, we believe that now is the right time to invest in northern and central European commercial real estate.

Europe: a diverse region offers opportunitiesIn all the discussions about Europe’s future prospects, the continent’s great diversity is often overlooked. It is the world’s second largest economy, and the figures for Europe as a whole do not reflect the significant differences between its individual cities and regions. While some cities in southern Europe are mired in a deep recession, there are others, particularly in Germany

and Scandinavia, that are growing strongly due to their strong connection with the global economy (see figure 1). This leads to high demand for commercial office space.

These growth cities can be divided into three main categories. The first group comprises cities in which production sites for high-tech or luxury goods in high demand in Asia, Eastern Europe and the US are located. Examples include Böblingen (Mercedes), Ingolstadt (Audi), Munich (BMW, Siemens), Stockholm (Ericsson) and Tampere (mechanical engineering). The second group comprises international financial and commercial centres such as Geneva, London, Paris and Vienna. The third group comprises

university cities, such as Bonn, Cambridge, Karlsruhe, Lyon and Uppsala, as well as technology clusters in major cities ( such as Silicon Allee in Berlin, Silicon Roundabout in London). Growth is stimulated by innovations in fields such as cloud computing, medicine and inkjet-based manufacturing technologies. Another growth driver for the labour market is the “clustering effect” arising from the internet in areas such as web design and software technology. Many of the old jobs these are replacing, e.g. in book retailing and travel agencies, are spread across thousands of smaller and larger cities.


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Limited offer pipeline underpins valuationsNearly all markets are currently at a very low point in the real estate development cycle. Historically, trends have always varied from city to city and have been dependent on local fluctuations in rental demand and vacancies and on local planning policies. But one consequence of the global financial crisis is that banks have been very hesitant to make real estate loans, resulting in a significant slump in the amount of new construction throughout Europe. The total amount of office floor space in the major cities of continental Europe increased by just 0.8% in 2012, compared with a long-term average of 1.7% per year. For shopping centres, the share of new construction is now 50% below its record high from 20081 (see figure 2). The risk of European

real estate markets being flooded in the coming years by an excess supply of new space therefore appears to be low, with the likely outcome that rents will be boosted.

Good market timing: attractive real estate pricesThe prices of many commercial properties are attractive. CBRE indices based on RICS market value calculations show that the prices of commercial properties in France, Germany and Scandinavia are on average still around 15% below the peaks achieved prior to the financial crisis. While yields on office space in prime locations in London’s West End, Munich, Paris and Stockholm have fallen considerably since 2009 to net initial yields of 4.0% to 4.5%, yields on many good, investment-grade properties

in northern Europe still lie between 5.0% and 6.5%. For instance, the average net initial yield on office space in Paris outside the business district was 6.0% at the end of June 20122, just 0.25% below the comparable value from June 2009 (see figure 3). In our view, the prices of these core properties are increasingly attractive because the sovereign debt crisis is gradually weakening. We are also firmly convinced that these assets are less likely to react to an increase in northern European government bond yields than first-class properties.

Figure 1: The 30 northern European cities with the highest growth rates between 2012 and 2017

Figure 2: Trends in office space and shopping centres in Europe


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1 Source: PMA. As at: October 2012. 2 Source: IPD. As at: July 2012.

Source: Oxford Economics, Schroders. December 2012.

Forecast economic growth in % per year Net increase as % of existing floor space

Stavanger OsloIngolstadtMunichReadingLondonUppsalaRosenheimCambridgeTampereRastattZugGothenburgWolfsburgTurkuMalmöGenevaKarlsruheNeussRegensburgParis - WestBremenHanoverStockholmCopenhagenZurichViennaRennesHelsinkiBöblingen

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Property Market Analysis. October 2012.

Please note: Data for Denmark, the eurozone, Norway, Sweden and the UK. The figures for 2012 and 2013 are based on estimates.

n Export n Technology

n International business n Other

n Offices

n Shopping centres

0 00,5 11,0 21,5 32,0 42,5 53,0 3,5 4,0 6

important note: The views and opinions expressed herein are those of Schroder Property Investment Management Limited, and do not necessarily represent the views stated or expressed by Schroders in other communications, strategies or funds.

If you would like to receive information about our products, please do not hesitate to get in touch.

Philipp Ellebracht Head of Property Product Continental Europe

[email protected] Telephone +49 (0) 69 97 57 17-816

Buy in troubled times...Now is the right time to invest in northern European commercial real estate. Even though there are no signs of rent increases in most of the region until 2015, it is expected that rents will recover either during the course of this year or in 2014 in cities with good growth opportunities, low vacancy levels and low levels of new construction activity. In addition, we are convinced that the current difference in yields between core real estate, at 5.0-

6.5%, and 10-year French or German government bonds, at 2.25% and 1.75% respectively, is a persuasive argument. Even though history never repeats itself exactly, long-term IPD indices for Sweden and the UK show that investors acquiring real estate holdings following the deep recession at the beginning of the 1990s generated high overall returns in the following five years.

Schroder Property already manages pan-European real estate funds for

Figure 3: Capital value of commercial properties Yields on office space in Paris and French government bonds

Source: CBRE European Valuation Monitor, Datastream, IPD, Schroders. November 2012.

institutional investors who invest in core real estate and have a focus on stable distribution yields, liquid real estate markets and a diversified portfolio.


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France Germany Scandinavia Southern Europe UK

Paris business district Paris without business district Remaining IIe-de-France 10-year government bonds

110

100

90

80

70

60

8

7

6

5

4

3

2

2007 Q4 = 100 Net yield in %

2008 2007/Q42009 2008/Q42010 2009/Q42011 2010/Q42012 2011/Q4 2012/Q4

The game that is today played throughout the world, although primarily in former English crown

colonies such as Australia, India and Sri Lanka, and naturally England itself, is said to have begun as a game called “Creag” at the Kent residence of Prince Edward in the 13th century. In 1598, a court case reported on a type of sport called “kreckett.” There was a dispute about ownership interests in a parcel of land, and one of the parties to the dispute claimed they had played kreckett on this property since their childhood.

Another indication of the early existence of cricket can also be taken from a court case: in 1611, two adults were sentenced in court for playing cricket on a Sunday instead of attending church. This

A sport for gentlemen – cricket, the fine way to playCricket is probably the only sport with a scheduled time out for tea – how typically English! And it is actually so complicated that you really only understand one thing: nothing at all.

From the UK

was also the first evidence that cricket was played not just by children, but also by adults. This theory was reinforced when records were found indicating that during the English Civil War, entire villages played cricket against each other.

The sport reached its zenith in 1660, when cricket became so popular in England that as well as playing the game, people also placed bets on who would win. Aristocratic wealthy citizens in particular enjoyed betting their money on individual teams. Cricket therefore developed from just a type of sport to a form of gambling. This can probably be explained by the fact that for the layman, cricket is very opaque and difficult to assess. In addition, much depends on the throwing luck of the players, so that both

the experienced and the layman could easily place a bet.

In the 18th century, significant aspects of the game were further developed, and cricket became the national sport in England. Aristocrats and rich merchants began to set up their own teams. Venues were established in London in 1707 at the Artillery Ground in Finsbury, and the legendary Lord’s Cricket Ground was finally built in 1787. The Marylebone Cricket Club, which was founded in the same year, quickly became the number one location in the sport and is still the keeper of the Laws of Cricket today.

We will not attempt here to explain the opaque rules of the game to the layman – suffice it to say that cricket is a team sport played by two teams, each with 11 players.


MISCELL ANEOUS

A typical game can last between one afternoon and several days. Although the flow of the game and the rules vary considerably, the basic concept of cricket and baseball are the same. The beginning team takes its turn at batting (an inning) and attempts to hit the ball as often as possible and to score as many points (runs) as possible. The opposing team plays in the field and attempts to end the inning of the other team. After each team has played the same number of innings (either one or two, depending on what was agreed before the start of the game), the team with the most runs wins.

Cricket was for a long time more popular in the former colonies than it was in its native country. But the British, too, have learned to enjoy their export hit again. Even

today, the game still contains enchanting old-fashioned elements that hint at its past as a way for idle aristocrats to while away the hours: the crisp white shirts and trousers at the test matches, despite the fact that players sometimes have to dive to the ground; the cable-knit slipover that players put on as soon as the temperature falls below 30 degrees – cricket is one of the few sports in which you are dressed properly, complete with a hat and sunglasses; and the formal handshake, with which the two opposing batters congratulate each other for their “partnership” when one of them scores a hundred runs.

A hundred points in cricket is called a “century” – and a game of cricket can certainly sometimes seem to last years rather than days. You simply have to love

a sport that calls an “over” (set of six balls) in which no runs are made a “maiden”, and that has a “tea break” instead of half-time. And then there are the umpires, with their wide-brimmed hats and stoicism. With great dignity, the umpire holds the hat of the bowler for as long as he has his turn. This ritual is a symbolic gesture of humility. In the 19th century, when umpires were first introduced, players protested that a gentleman himself knows best what unsportsmanlike conduct is.


MISCELL ANEOUS

In addition, the invention of the railway was a catalyst for the industrial revolution and global trade.


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It was the first time in the history of Schroders that the fortunes of the bank were managed by two partners. John Henry, who was just 24 years old at

the time, and his business partner were an extraordinarily successful duo: John Henry, the young businessman with the Schröders roots, and Alexander Schlüsser, the experienced merchant from Russia with excellent connections in his old home. Under their joint leadership, the assets of the company quadrupled within just 20 years (from 1850 to 1870). This successful development is particularly impressive in light of the political turmoil that existed at that time, including the Revolution of 1848 and the Crimean War. The main trading good, just like in Johann Heinrich’s days, was sugar, which was delivered from Cuba to Europe and the US. Other important lines of business for them included the shipment of wheat, flour, cotton, coffee, guano and much more.

The invention of the railway was a catalyst for the industrial revolution and global trade, and John Henry and Alexander Schlüsser benefited enormously from this development, too. In just a few years, the railway developed in the 19th century into a networked form of transportation. While there were just 332 kilometres of railway lines in 1830, there were 221,980 kilometres 40 years later. This meant goods could be transported faster and more affordably, which enabled many merchant banks to increase their merchandise sales many times over. Yet governments and state-owned enterprises were usually not able to finance the construction of the railways by themselves, so European merchant banks, among them the up-and-coming J. Henry Schröder &

Co., provided them the necessary funding. John Henry and Alexander recognised this opportunity early on and from 1850 expanded the bond business as a second important foundation of their company. They transformed the small Anglo-German trading firm into one of Europe’s most important merchant banks. In 1853, J. Henry Schröder & Co. issued a bond for the first time in London on behalf of Matanzas and Sabanilla Railroad Co., the Cuban railway company. The company celebrated one of its biggest successes to date in 1870 when Japan, in the midst of modernisation, needed funding for its first railway line between Tokyo and the port city of Yokohama. J. Henry Schröder & Co. managed the first bond issuance of the Japanese government on the London market, which catapulted the company into the ranks of the leading merchant banks worldwide.

In 1870, Schröder was the second largest financing company in London, behind Baring Brothers but ahead of Kleinwort, Hambro and Rothschild. It was the highlight of the Schröder banking dynasty’s story to date. As explained in the Schröder family history by Richard Roberts, the bank at that time consisted of just two partners, 40 employees and capital that would be worth about EUR 200 million in today’s figures. This meant that J. Henry Schröder & Co. dominated international trade financing.

After successfully building up the business of J. Henry Schröder & Co., Johann Heinrich retired in 1849. His eldest son Johann Heinrich Wilhelm, known as John Henry, followed in his father’s footsteps and became a partner at the parent company in London. Together with the Russian merchant Alexander Schlüsser, John Henry managed the company, developing it into one of the world’s most important merchant banks.

History of Schroders

The journey to becoming one of the most important merchant banks

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The title of the book could not be more fitting for Warren Buffett, one of the most powerful people in the world today. With

his quote, “Life is like a snowball. The important thing is finding wet snow and a very long hill”, Warren Buffett sums up not only his investment wisdom, but also how he has lived his life. Initially, his snowball was quite modest. Buffett earned his first money when he was six years old, buying Coca-Cola six-packs for 25 cents and reselling the individual bottles for five cents each.

This first comprehensive biography of the investor, on which he himself collaborated, was written by Alice Schroeder. Buffett gave Schroeder, a former reporter at the Wall Street Journal, access to his archives, was interviewed by her for a total of 300 hours over four years, and permitted her to read his private and business correspondence. His career is described in detail in the book. For example, we learn how he earned money as a newspaper delivery boy, and then began to rent out pinball machines and sell used golf balls, and how at the age of 11, he had his first experience with investments and stock trading at his father’s company. The book covers various investments that he made, the building of his investment company Berkshire Hathaway and his life today.

The result is a book about one of the most powerful and richest men alive today, and a unique individual. It is the story of someone who became the world’s richest man not by being greedy, but by being thrifty.

Schroders’ recommended reading

The Snowball – Warren Buffett and the Business of Life

Our verdict:A very readable book about a fascinating man, written in an interesting, captivating way. This book is for anyone who believes in the “American dream” – beyond the glittering facade.

Publishing informationPublished by: Schroders Denmark Filial af Schroder Investment Management (Luxembourg) S.A. Store Strandstræde 21, 2nd, DK-1255 Copenhagen

Editor: Lars K. Jelgren

Copy deadline: 17 April 2013

Graphics: A. Punkt, Darmstadt

Important InformationThis document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund or Schroder GAIA (the “Companies”). 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 Companies can only be made on the basis of its latest prospectus together with the Key Investor Information Document, 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 Companies 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 back 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 Fondsmæglerselskab A/S, Store Strandstræde 21, 2nd Floor, DK-1255 Copenhagen.For your security, all telephone calls are recorded.Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider’s consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.se contains additional disclaimers which apply to the third party data.

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Store Strandstræde 21, 2ndDK-1255 Copenhagen KPhone: +45 3315 1822Fax: +45 3315 0650www.schroders.com/dk

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Ketil Petersen Country Head Nordic RegionDirect phone: +45 3373 4899 Mobile: +45 5120 8079Email: [email protected]

Viggo Johansen Head of Institutional Sales, Nordic Sweden, FinlandDirect phone: +46 8 545 136 65 Mobile: +46 70 678 55 30Email: [email protected] Johansen Senior Institutional SalesDirect phone: +45 3373 4896 Mobile: +45 4080 2843Email: [email protected]

Lykke Jensen Chief Operational OfficerDirect phone: +45 3373 4898 Mobile: +45 2410 2667Email: [email protected]

Marianne Pedersen Business ManagerDirect phone: +45 3315 1822 Email: [email protected]

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Anders Nilsson Intermediary SalesDirect phone: +45 3373 4890Mobile: +46 70 595 22 70Email: [email protected]

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Britt Larsen Client ExecutiveDirect phone: +45 3373 4892Email: [email protected]

Stephan BachAnalystDirect phone: +45 3373 4890Email: [email protected]


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Founded in 1804 in London, Schroders is one of the largest globally active and independent asset managers. This independence enables Schroders to focus its extensive knowledge and experience on the company’s core business:

managing investment funds.

www.schroders.com

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