Page 1 of 5 Morningstar Research Report Text as of 10/04/2014, Data as of 13/10/2014 Morningstar Analyst Rating Analyst Rating Spectrum Œ Á Morningstar Rating TM QQQQQ 100k 80k 60k 40k 20k 10k Returns Price NAV Category Index Last Closing Price GBP 184.25 Last Closing NAV GBP 184.70 Discount/Premium % -0.35 Latest Published NAV 184.90 Latest Published NAV Date 13/10/2014 Traded Currency GBX Yield 4.04 Dividend Frequency Quarterly Total Assets Mil 451.4 Net Assets Mil 410.1 Market Cap Mil 409.5 Net Gearing % 6 Avg Daily Shares Traded Mil (3 month) 0.18 Inception Date 28/07/2005 Morningstar Analyst: Jackie Beard Executive Summary People: The fund benefits from a seasoned manager in Matthew Dobbs, supported by nearly 30 dedicated equity analysts across the Pacific region. Parent: The acquisition of Cazenove brings quality investors but also challenges in terms of integration. Board: The board numbers only four members and they all bring investment experience. Process: The process combines a top-down overlay with bottom-up stock selection. The manager relies heavily on the inhouse research teams. Performance: Since Dobbs took charge the fund has outperformed its Morningstar Category by a healthy margin. Fees: The base management fee is low and gives the fund a competitive advantage against its peers, but the performance fee erodes this competitive edge. Role in Portfolio Supporting Player. This fund is suitable for investors seeking Asia Pacific exposure (excluding Japan) to diversify a broader portfolio. Its income bias gives it added appeal for investors wanting income from their assets. 4k 20 Discounts Premium 10 Discount 0 Average Line -10-20 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD Performance % 5.10 23.75-40.39 89.22 35.64-5.68 27.12 1.26 8.68 Fund Price 17.84 25.30-37.15 61.97 34.54-4.80 27.78 0.85 8.41 Fund NAV 2.68-9.08-3.63 11.82 12.82 11.49 11.20-0.65 2.43 Category 1.71-8.86-3.70 7.75 12.70 10.17 10.85-0.63 2.58 Benchmark Morningstar Opinion 10 Apr 2014 For income-seeking investors, we think Schroder Oriental Income fits the bill. While the fund posted modest underperformance in 2013, we maintain conviction here for a number of reasons, the first of which is fund manager Matthew Dobbs. He has been in situ here since fund's launch in July 2005, but his experience in Asian equities extends much further. He joined Schroder in 1981 as an investment analyst and started running money four years later; thus, he has witnessed a number of market cycles over the years. He has also spent his entire working career so far at the firm, which means he has a strong working relationship and understanding of the analysts at the firm and knows their strengths and weaknesses. Dobbs himself specializes in global small caps and Asian equities; on the latter, he's supported by a team of nearly 30 equity analysts across the Pacific region. We think this gives him a distinct advantage, as local teams have better access to companies they research and a better understanding of the local market. prospects; they will evaluate its ability to meet strategic goals and based on this, they will rank stocks from 1 (strong buy) to 4 (strong sell), providing Dobbs with a base from which to work. With the goal of providing a progressive dividend in mind, companies will be expected to contribute to the portfolio yield; that said, stocks that currently do not pay dividends, but have potential to do so, will be considered, too. The process is thorough and benefits from the experience and local expertise of the team, as well as Dobbs' stock-picking skills. It's a process that has seen a number of market cycles and over the long term Dobbs has delivered excellent results for his shareholders, both at this fund and at his other charges, where his track record extends back much further. Dobbs has also used risk well here. Despite gearing being a steady feature in the fund, he has still managed to keep risk muted without compromising on returns. The income focus of this fund has also protected it somewhat as last year it held up better than Dobbs' other funds, although the weakness of the Australian dollar hurt. Indeed, company meetings play an important role in the process. Dobbs' starting point is to set his country exposure; he considers output from the in-house economics team as well as the local offices' views and then builds his conviction. That's followed by stock selection. Dobbs will have a regular dialog with the in-house research. The analysts focus on company strategy and assess its competitive position and growth The board has been able to stand by its commitment to pay a rising dividend each year so far, equating to a yield of between 4% and 5%. Our caveat at this fund is expenses. Although the base management fee is competitive, the performance fee can erode this edge. Nevertheless our conviction is sufficiently high to retain the fund's Silver rating.
Page 2 of 5 Morningstar Research Report Text as of 10/04/2014, Data as of 13/10/2014 People Manager Matthew Dobbs Manager Start 28/07/2005 Avg. Manager Tenure Other Funds Managed 9.2 Years Schroder Asia Pacific Ord, Schroder Asian Alpha Plus A Acc, Schroder ISF Global Smaller Comp A Acc, Transamerica International Small Cap I2 This fund benefits from an extensive team of local portfolio managers and analysts led by a highly experienced manager in Matthew Dobbs. Dobbs has more than three decades of investing experience and has spent his entire career at Schroders. He joined the firm in 1981 as an investment analyst and became a portfolio manager four years later. He joined the global small-cap team in 1996 and started running Asian small-cap portfolios from that date. In 2000, he was appointed head of global small-cap equities, and he's also part of the Asian Specialist team. Dobbs oversees four regional teams together with Richard Sennitt, with whom he comanages his global funds. In addition to this offering, he runs a number of other funds, some of which are global small-cap funds and others are higher up the cap scale and focused on Asia ex-japan. He is supported by nearly 30 dedicated equity analysts across the Pacific region, with an average of 15 years' investment experience, covering larger-cap stocks. The analysts are located in Schroders' offices in Hong Kong, Singapore, Seoul, Shanghai, Sydney, and Taipei, which brings local expertise and an understanding of cultural nuances. Parent Fund Advisor Domicile Website Schroder Investment Management Ltd GUE www.schroders.com/uksoif/ho me Schroders has benefited from stable ownership since it was founded more than 200 years ago and the Schroder family still holds nearly half of the company's listed shares. At 30 Sept 2013, following completion of the Cazenove acquisition, the company's assets under management surpassed GBP 250 billion. Schroders' current strength lies in its equity funds. The firm also manages fixed income, alternatives, and multi-asset funds; the acquisition of Cazenove Capital helps to extend the product range further, particularly within the pan-european equities, fixed income and multi-manager investment areas. Cazenove, like Schroders, is focussed on asset management and the acquisition brought some quality fund managers, such as Julie Dean, to the firm; that said, the two companies are yet to be fully integrated, which might result in a potential product rationalisation. We also have seen some departure from Cazenove following the acquisition. On a positive note Schroders has become in recent times more adept at managing capacity issues with some of its more popular funds, where previously it had over-marketed already hot-performing products. Fund managers' remuneration is based on the performance of their funds over one- and three-year periods and generally more weight is placed on three-year returns, but there are teams, such as GEM, that put more emphasis on one-year results. Board of Directors Discount Target 5% Tender Offer No Buyback Authorization Yes The board of Schroder Oriental Income numbered three non-executive directors at the fund's launch and all three are still in situ; they were joined by Fergus Dunlop in 2008 and for now the board is not searching for any additional members. All four directors bring investment management experience rather than industry careers; while a fifth member could bring an industry perspective, this would increase the fees paid by shareholders. Two of the board members have direct experience gained locally in the region: Peter Rigg and Christopher Sherwell have both worked in Hong Kong. Three of the directors sit on the boards of other listed companies, but as this is a Guernsey company, that's not a surprise as the board needs a quota of Guernsey-resident directors. With the exception of Christopher Sherwell, all directors are considered independent; Sherwell used to work as a managing director of Schroders in the Channel Islands until 2004. All directors are shareholders in the fund, which we like to see, as we believe it aligns their interests with those of their shareholders. The board meets at least four times a year although communication is far more frequent with the manager.
Page 3 of 5 Morningstar Research Report Text as of 10/04/2014, Data as of 13/10/2014 Process: Investment Approach Investment Objective: To provide total return through investments in equities and equity-related investments in companies, which are based in or derive a significant proportion of revenues from the Asia Pacific region. No Holdings Range 70-80 Max Position Size Min Position Size Expd Turnover Approximately 80% Sector Constraints Regional Constraints Asia Pacific - Excluding Japan Hedging Policy Unhedged Tactical Use of Cash Yes Dobbs follows a bottom-up process with a topdown overlay. He determines country allocations using Schroders' central economics team research, views from the local offices, and by talking to his contacts. Stock selection is based principally on ideas generated by Schroders' analysts, but he also uses his extensive network of contacts. Fundamental analysis combined with company meetings is the foundation of the analysts' research. They focus on company strategy and assess both its competitive position and growth prospects. Their evaluations include historic and prospective earnings growth, quality of earnings, competitive position, barriers to entry and focus on shareholder value. Based on these factors, they will compile cash flow and earnings estimates to evaluate a company's ability to meet its strategic goals. Following this research, analysts generate a recommendation for each stock, on a rating scale of 1 (strong buy) to 4 (strong sell). Dobbs focuses mainly on stocks rated 1 and 2; however, he's not excluded from holding a stock ranked 3 if it fits his needs. Dobbs likes to see earnings growth potential and sustainable returns in his companies. The fund does not have a specific yield target; rather, it aims for a progressive annual dividend. Dobbs expects stocks to contribute to the portfolio's yield, but he will not disregard non-dividend-payers if he believes they have potential to do so. The portfolio will typically consist of 70 to 80 of the best ideas in the region. Process: Portfolio Positioning Morningstar Holdings Based Style Map Deep Val Val Grw High Grw Giant Large Mid Small Micro World Regions Assets % Greater Europe 3.79 United Kingdom 3.79 Europe-Developed 0.00 Europe-Emerging 0.00 Africa/Middle East 0.00 Americas 0.00 North America 0.00 Latin America 0.00 Greater Asia 96.21 Japan 2.67 Australasia 25.14 Asia-Developed 50.81 Asia-Emerging 17.59 Not Classified 0.00 The fund's country and sector exposures are substantially different from its benchmark MSCI AC Asia-Pacific ex Japan and category peers, which reflects the unconstrained nature of the fund. Positions are a result of the search for yield in the first instance, though. Relative to peers, Dobbs has been underweight in Australia and China for some time now, with overweights in Singapore Asset Allocation -100-50 0 50 100 Top 10 Holdings 31/08/2013 % Assets Long Short Net Cash 4.7 0.0 4.7 Equity 85.3 0.0 85.3 Bond 0.0 0.0 0.0 Other 10.1 0.0 10.1 % Assets Fortune Real Estate Investment Trus 4.64 Taiwan Semiconductor Manufacturing 4.21 Taiwan Mobile Co., Ltd. 3.58 HSBC Holdings PLC 3.23 LG Chem Ltd 3.06 Sydney Airport 2.64 Venture Corporation Limited 2.53 China Petroleum & Chemical Corporat 2.44 Hopewell Holdings Ltd. 2.40 Fletcher Building Ltd. 2.38 and Taiwan in particular. At a sector level at 28 Feb, the fund was overweight materials, industrials and telecoms relative to peers, and underweight consumer staples and technology--the latter in particular due to the lack of yield from most stocks. Dobbs also has a bias to mid- and smallcap names relative to peers in this fund; given his expertise lies in that area, that's likely to remain. Sector Weightings % Equity h Cyclical 55.1 r Basic Materials 9.7 t Consumer Cyclical 12.4 y Financial Services 12.8 u Real Estate 20.2 j Sensitive 38.3 i Communication Services 12.4 o Energy 2.9 p Industrials 10.4 a Technology 12.7 k Defensive 6.6 s Consumer Defensive 4.8 d Healthcare 0.0 f Utilities 1.8
Page 4 of 5 Morningstar Research Report Text as of 10/04/2014, Data as of 13/10/2014 NAV Performance Analysis Data as of 30-09-2014 Trailing Returns Price Total Rtn % Bmark 3 month 1.35-0.68 6 Month 7.43 1.95 1 Year 4.67-1.17 3 Year Ann. 13.84 4.32 5 Year Ann. 14.95 8.50 Since its inception to 31 March, the fund has returned 11.6% annualized, outperforming its Morningstar Category average peer by nearly 3 percentage points. It hasn't been smooth, though. In 2007 the market was driven by momentum, even as the subprime fears were starting to unfold; this meant that more value-tilted, dividend-paying stocks trailed growth names. An underweight in China also hurt and the fund lagged its category by 9 percentage points that year. In 2008 the fund lost 37% compared with the category average loss of 33.5%, but it gained 62% the following year, 11 percentage points more than its category. In 2013, slow underlying dividend growth across the region held back stocks, as did concerns over the impact of tapering by the US Federal Reserve. Trailing Returns NAV Total Rtn % Bmark Cat %Rnk In Cat 3 month 2.26 0.23-0.21 64 6 Month 6.08 0.59 0.57 62 1 Year 6.27 0.43 0.81 33 3 Year Ann. 14.28 4.76 4.90 5 5 Year Ann. 13.71 7.26 7.39 4 Calendar Total Returns Fund(price) Fund(NAV) 50 40 30 20 10 0-10 2010 2011 2012 2013 YTD -20 Discount / Premium Data as of 13-10-2014 Discount / Premium % 6 Mo 1Yr 3Yr High +3.96 +4.16 +5.92 Average +1.56 +0.84 +1.89 Low -2.29-4.71-4.71 Z-Statistic 0.31 0.57 0.10 The board maintains an active discount policy and aims to keep the discount below 5%. Historically, it has bought back shares when the discount has widened to double digits and we've seen them issue shares when the fund has traded at a premium. Over the last three years the fund has been trading at an average discount of just 0.04% (10 April), which has increased to 1% in the last six months. Risk & Return Data as of 30-09-2014 Morningstar Rating Return Risk Rating 3 Year High Below Avg QQQQQ 5 Year High Below Avg QQQQQ 10 Year Overall High Below Avg QQQQQ Dobbs has used risk well and rewarded his shareholders amply for the risk that he's taken. Indeed, the fund's five-year Morningstar Risk rating is below average, yet the risk-adjusted returns exceed those of the category over the same period by more than 10 percentage points. The level of gearing has been well managed and kept in single digits when in use in the last few years. The fund is well diversified, which reduces concentration risk; it comprises approximately 80 stocks with the top 10 holdings accounting for only around 32% at 31 Jan. The fund's income focus means it can behave quite differently from both its peers and benchmark as it tends to give the fund a lower relative beta, helping to dampen its volatility. Volatility Ratios 3 Yr NAV 5 Yr NAV Standard Deviation 12.13 13.83 Mean 1.22 1.18 Sharpe Ratio 1.08 0.83 Sortino Ratio 1.86 1.33 Risk vs Index 3 Year 5 Year Alpha NAV 6.75 7.64 Beta NAV 0.81 0.87 R-Squared NAV 84.85 90.18 Treynor Ratio NAV 19.94 16.24
Page 5 of 5 Morningstar Research Report Text as of 10/04/2014, Data as of 13/10/2014 Fees Management Fee % 0.75 Ongoing Charge ex Perf Fee % 0.95 Gearing Total Assets Mil 451.4 Net Assets Mil 410.1 The fee comprises an annual management fee and a performance fee. The base management fee is 0.75% of net assets. A performance fee is taken if, over a 12-month period, the fund's NAV exceeds a hurdle rate of 107% over that year. The NAV must also be higher than 100p or the highest adjusted NAV that was used when a performance fee last became applicable. That ensures Dobbs has the ability to gear the fund up to 25%, through a short-term loan. Given how low interest rates are and how cheap borrowing is, the board has put two loans in place, in AUD and USD. Since mid-2009, overall gearing has been kept at single digits and Dobbs has even been holding cash at times to offset the overall level of gearing. Throughout most of 2010 and until the third quarter of 2011, Dobbs held net cash as he that any underperformance is made good before the performance fee can accrue. The NAV is adjusted for all capital transactions over the period, as well as dividend payments. The base management fee is low and gives the fund a competitive advantage against its peers, but the performance fee erodes this competitive edge. lacked conviction in the markets. At the start of 2012, Dobbs gradually took a little more risk in the fund, but took it back down again to some 3% by mid-2013 on a lack of strong views about market directions. In 2014, he has been adding slightly to gearing as this portfolio has a lower beta than his other charges, due to the income requirement. Further, a loan in AUD has helped to protect capital against the weak currency. Dividends Dividend History 2012 2013 YTD Dividend 6.80 7.45 4.50 Special Dividend 0.00 0.00 0.00 Total 6.80 7.45 4.50 The fund aims to provide progressive dividend growth and it has delivered on its promises so far since the fund's launch in 2005. The manager can boost the fund's income by writing covered calls; however, that is not a regular feature at this fund. The board has also built up the revenue reserves such that the dividend is covered, at its current level, for more than 12 months. Until May 2013, dividends were paid in two tranches. In 2013 the board announced its intention to increase its frequency to quarterly payouts.