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Edition N°7 1st quarter 2011 MARKETING NOTICE Fund proﬁle Markets Special feature Frontier Markets Contact Schroders’ new demographic Go West! Strong corporate “We only have one chance,” What effect will revolutions, We hope we’re still fund seeks to benefit from says Sir David King, former massive demonstrations here for you in 30 earnings and other positive and political unrest mean for years’ time! Take a the 21st century’s megatrend. surprises in the US. scientific advisor to the look at your Retail stock markets in the affected UK government. countries and regions? Funds team! Page 2/3 Page 5 Page 6 Page 8 Page 8 Editorial Stair lifts and reading glasses Demographic change will lead to major changes in societies worldwide – more and more megacities in emerging markets, and more pairs of reading glasses here at home. countries, too – Italy, Germany and Ketil Petersen, Austria,for example – will also probably (30 years older), age rapidly. And last but not least, the CEO birth rate is declining. In many Megatrends and marketing fads European countries this has been the Close scrutiny of innovations is one of case for years, and it is now occurring the main tasks of an independent in China, and will probably affect India media. Some say that demographic in around 2030. This will cause the funds are a marketing strategy to push working age population between 15 yet another overblown fund theme onto and 64 to shrink slowly but steadily the market. With all due respect to the scepticism that is a journalist’s worldwide. Demographic change is a professional metier, they’re wrong. megatrend for the next 40 years. Which Demographic change is a real means that this tide cannot be turned “megatrend”, not a marketing strategy. back, even if we got a grip on our It’s worth taking a look back to the homemade problems, such as the height of dot.com euphoria to compare slump in the birth rate caused by the one with the other. At the time, new pill, the difficulty of combining career ideas were in demand as never before, and children, and the rising financial quickly becoming first a small online and social demands on potential company, then an IPO and finally the A world in upheaval: In western industrialized countries the “Zimmer frame” (age 65+) generation parents. next hot stock on the NASDAQ. is the only section of the population growing steadily. Apart from this group, numbers are falling. However, as an investor it is possible Naturally enough, new thematic funds But in parts of emerging markets, population numbers are rocketing. Demographic change sprouted like mushrooms. IPO funds, cannot be stopped – and it brings considerable investment opportunities with it. to prepare for these developments and which only invested in new offerings, draw the right conclusions from them. were particularly hip. Virtually all of these The term “demographic change” is about to around 330 million Chinese Business will have to adapt to the funds have failed. A more critical as sexy as the term “pensions”. No-one being over 65 in 2050? changing demographic realities. approach would have been appropriate, likes to think about it. It is too abstract and … there are already more Kentucky For example, the greying of society is but everyone got carried away with the too far removed from our own everyday Fried Chicken restaurants and a boon for the healthcare sector, growth euphoria, including the press. But lives – and yet we are all riding the long Starbucks branches in China than in emerging markets is good for the fashionable funds were never wave of demographic change that will in the US? infrastructure sector, and consumption Schroders’ thing – retaining the trust alter the world as we know it. The … the world’s population will be habits will change worldwide. In short, and confidence of our investors has phenomenon of demographic change can around 9 billion in 2050, and 98% investors should be on the lookout for always been our primary concern. So it is with utmost conviction that we are be approached in a number of different will live in countries which we call companies set to benefit from launching our demographic fund. ways; one way is through statistics. “emerging markets” today? demographic change and achieve Virginie Maisonneuve, Schroders’ Head Incidentally, 84% of the world’s sustainable growth. That makes the of Global Equities, has been looking at Did you know that… population already lives in whole topic sound much more the themes of climate change, “Chindia” … life expectancy has been increasing emerging markets. interesting, doesn’t it? and demographic change for years. by three months annually since With the help of Jürgen Lanzer, our 1840? The life expectancy of This is not a tide that can be demographics fund manager, she has newborns is 78.5 years in rolled back built up a unique global database on Denmark, 79.1 in Finland, 80.1 in By combining a whole host of individual Schroders has been named demographic change covering both Norway, 80.8 in Iceland and 81.0 factors like these, we get a view of what European Asset Management industrialized countries and emerging in Sweden. demographic change really means. Company of the year for the second markets. Schroders is not jumping on a … the average age globally was 28.4 in Currently most of the world’s year in a row. bandwagon or pandering to a fad with this fund launch. We are in the driving 2009? Kenyans are 18.7 years old population growth is in emerging More on page 7 seat and leading the way! on average, Egyptians 24.8, markets, and they will account for Mexicans 26.3, Chinese 34.1, around 98% of the increase forecast I wish you pleasant reading. Austrians 42.2 and Germans 43.8. between now and 2050 – from … in 2030 a quarter of the population 6.8 billion today to 9 billion. of industrialized nations will be of Many developed countries, by contrast, pensionable age, compared with are already ageing rapidly. The worst hit only a tenth of the population in is Japan, whose population (currently emerging markets? 127 million) could halve by 2100 if … China’s one child policy will lead current trends continue. But European Fund profile Schroder ISF1 Global Demographics & Wealth Dynamics Schroder ISF Global Finding tomorrow’s winners Demographics & Wealth Dynamics is managed by Jürgen Lanzer (pictured) Over the next 40 years demographic change will not only affect economic and Charles Somers. growth and living standards, but will also impact policy in terms of taxation, Jürgen Lanzer has 12 years labour markets and general legislation. of investment experience. He joined Schroders as an analyst in 2007 and is responsible for the insurance sector in the With many emerging markets experiencing Jürgen Lanzer and Charles Somers, the managers of Global Equities team. Prior to joining Schroders, a population explosion and industrialized nations Schroder ISF Global Demographics & Wealth Jürgen Lanzer worked for WestAM and UBS. ageing, the consequences of divergent population Dynamics. Launched in November 2010, the fund Charles Somers joined Schroders as a US trends for the world economy are complex. As these offers investors the opportunity to benefit from the stocks analyst in 1998, concentrating initially on are mostly long-term developments, many investors global trend of demographic change. The portfolio is the healthcare and financial sectors. He has prefer to ignore them when analysing the operating widely diversified globally and is currently focused been responsible for the consumer goods environment and earnings sustainability of on six core issues. and consumer durables sectors since 2008. companies. Demographic change will alter the The two managers are supported by a Global competitive landscape for many companies and Core themes of demographic change Equity team of around 70 sector specialists sectors. This in turn will have a direct impact on Rising consumption in emerging markets and analysts. strategic planning and long-term decisions. Rising infrastructure expenditure in emerging Companies will have to rethink their brand markets with increasing population established international and local brands. positioning, production and productivity, and Growing demand for financial services in Demographic change is a process of adjustment and marketing and purchasing with an eye on emerging emerging markets evolution. In our view this calls for an innovative and markets and ageing consumers, as consumption Changing eating habits in emerging markets pragmatic investment strategy. As the Greek habits will have changed dramatically in twenty to Health: an ageing population brings more philosopher Heraclitus remarked in 500 BC: “There thirty years’ time. Companies such as Yum! Brands illnesses and rising health costs in western is nothing as permanent as change.” (which includes Kentucky Fried Chicken), which see countries The fund’s investment universe currently demographic change as an opportunity, will adapt Strong demand for pension services in western comprises around 9,000 stocks globally. Pre-selection their business model in time and probably be among countries and rising demand in emerging from this investment universe is carried out through tomorrow’s winners. In ageing societies, healthcare countries quantitative research. Schroders monitors markets companies are likely to earn higher profits if, worldwide, analyses demographic trends and is able for example, heart disease, cancer and cognitive The fund managers believe that globalisation will to respond quickly if new developments emerge. diseases become more widespread or greater tend to erode the distinction between industrialized Schroders Research, which comprises around emphasis is placed on disease prevention. Examples nations and emerging markets as far as individual 70 global sector specialists and analysts in local of possible investments are Pfizer and Rhön-Klinik AG. stock selection is concerned. Demographic change – markets, covers around 90% of global equity markets. Infrastructure is likely to be another sector which be it population growth or ageing – will impact At the country level, the analysts take account of will benefit from demographic change as the mega- consumption everywhere, creating new business local preferences and lifestyles just as much cities of the emerging world grow ever larger and opportunities. The decision in as fundamental economic new cities spring up as a result of population growth. favour of an investment “Schroders is launching a global fund that will data and the impact of At the same time, minor changes could determine should be based on a focus on the trends of the future. This is demographic change on the success or failure of companies. Will today’s company’s ability to adapt to exactly the right way to benefit from global economic growth and homeowners eventually buy stair lifts for their semis, changes in consumer changes. The fund’s prospects are consumption. At individual or will bungalows with wheelchair access become behaviour, irrespective of the promising, as it looks forward, not in the rear- stock level, the research team increasingly popular? Will laser eye treatment or country in which the company view mirror.” monitors how demographic reading glasses come out on top? And who, is based. The challenge for Euro fondsxpress 51/2010 trends impact companies, for example, will succeed in designing a mobile investors is to spot successful their competitors and their telephone which future older generations are happy companies early and to foresee the impact that economic environment (e.g. their customer base), to use? Questions such as these are asked daily by changes in consumer behaviour will have on and therefore their earnings outlook. Schroder ISF Global Demographics & Wealth Dynamics2 Reasons to invest Investment risks A, EUR hedged, A, USD, chroder ISF Global Demographics & Wealth S B ecause Schroder ISF Global Demographics acc. acc. Dynamics invests worldwide in companies & Wealth Dynamics invests in stockmarkets expected to benefit from the impact of worldwide, it is exposed to corresponding ISIN LU0557291076 LU0557290698 demographic change on the world economy. volatility. T he fund focuses on a long-term trend which T he fund can also invest in emerging Currency EUR USD is not yet reflected in conventional markets stocks and small-sized companies, consensus forecasts. which may entail higher risks than large Launch date 23 November 2010 T he fund invests in a concentrated stock international stocks, including increased Fund managers Jürgen Lanzer, Charles Somers portfolio of around 40 to 60 stocks, which are volatility and lower liquidity. selected without reference to a benchmark. Number of holdings 40-60 The fund can also invest in small caps. T he fund does not offer any capital protection. The value of the units in the fund T he managers use a disciplined and active may at any time fall below the price that the Benchmark3 MSCI All Countries World Index investment process with integrated risk investor paid for the units, resulting in losses. management. Up to 5.0% of the total subscription chroders Research covers around 90% of S T he fund may use financial derivatives as Maximum initial fee amount (5.26315% of the net asset value part of its investment process. This may global equity markets. Around 70 global sector per unit) specialists and analysts are onsite in all increase the fund’s volatility by increasing the important markets. impact of market events. Management fee (p.a.) 1.50% T here is a EUR-hedged unit class. Investing in the USD unit class carries currency risks for EUR investors. 1 Schroder ISF stands for Schroder International Selection Fund throughout this document. 2 Source: Schroders. Data correct as at 31 December 2010. The name of the fund is expected to change to Schroder ISF Global Demographic Opportunities in February 2011. 3 For illustrative purposes only. The fund has a free choice in picking the stocks for its portfolio. 2 | Schroders Expert 1st quarter 2011 Fund profile Fund managers Jürgen Lanzer and Charles Somers prospects. The portfolio can therefore diverge a weighting of 47% in the index. Schroder ISF Global use the MSCI All Countries World Index as their sharply from the benchmark, for example in its Demographic Opportunities & Wealth Dynamics is benchmark, but pick stocks independently from the geographical allocation. It can contain an emerging therefore focused on finding tomorrow’s winners, index. Based on fundamental analysis they select markets allocation of over 50%, while the index only wherever they may be. around 40 to 60 stocks for the portfolio which in has a weighting of around 13% in emerging market their view will be able to adapt to demographic stocks. Conversely, the portfolio’s allocation to North change and are not yet priced to reflect these growth American stocks could be only 20%, compared to Consumption changes with age4 Rising demand for ﬁnancial services in Asia5 Annual expenditure in USD The younger generation tends to spend money on entertainment, clothing, Growth of ﬁnancial services in Asia Credit card density alcohol and electronic gadgets, while the older generation spends more on package tours, medicines and nursing care. (USD) (Billion USD) Credit cards per person CAGR 25,000 5,000 3.0 Youth Setting up home 12% Clothing Property 4,500 Entertainment Furniture 2.5 2.43 4,000 Restaurants Children 2.7 Alcohol Car 3,500 2.00 20,000 2.0 3,000 16% 2,500 1.5 2,000 15,000 1.0 1,500 Family life Pension 11% 1,000 Education Health 0.5 Food Nursing care 500 Pension provision Package tours 0.02 0.09 Age 10,000 0 0 Under 25 25–34 35–44 45–54 55–64 65–74 75 and over 1997 2001 2008 2013(e) India China Korea Japan USA Vital statistics globally5 The best of both worlds Average age Births Life expectancy The portfolio of Schroder ISF Global Demographics & Wealth in years per woman in years Dynamics as at 31 December 20107 Afghanistan 17.6 6.53 44.64 Regions Sectors India 25.3 2.72 69.89 (%) (%) Structural focus 60 30 Mexico 26.3 2.34 76.06 55 Indonesia 27.6 2.31 70.76 50 25 45 World 28.4 2.58 66.57 40 20 Brazil 28.6 2.21 71.99 35 30 15 China 34.1 1.79 73.47 25 20 10 USA 36.7 2.05 78.11 15 Russia 38.4 1.41 66.03 10 5 5 Austria 42.2 1.39 79.50 0 0 Emerging markets North America Europe (ex UK) Pacific (ex Japan) UK Japan Cash Financials Consumer goods Consumer discretionary Industrials Energy Utilities Healthcare Basic materials Cash technology Information Telecommunication services Germany 43.8 1.41 79.26 Japan 44.2 1.21 82.12 The average person globally is around 15 years younger than an average German or Austrian, has more children and a much shorter life expectancy. ■ Fund ■ MSCI All Countries World Index 4 Source: United States Consumer Expenditure Survey, UN data, IMF, Bloomberg, National Statistics, Schroders. 5 Source: UBS, US Census Bureau, IMF, Higgins et al, Schroders. CAGR = compound annual growth rate in per cent. 2010 data. 6 Source: www.welt-auf-einen-blick.de. All data is for 2009. 7 Source: Schroders. Data correct as at 31 December 2010. Fewer and fewer children eat chocolates. The confectionery sector has to adapt Births (thousands) in Germany Looking more closely at one of the largest countries in Europe, Germany, with a long-term fertility rate of 1.4 children, Germany will age inexorably and probably lose 12 to 18 million of today’s population of 82 million by 2050. Half of Photo: Die Welt, Sergej Glanze the population will be over 50 years of age by then. As a result, the confectionery sector has to adapt its range of chocolates, sweets and chewing gum for the growing “Zimmer frame” generation. Wrigley, for example, not only manufactures traditional bubble gum for children. With its campaign “A Gum a Day”, the chewing gum manufacturer is currently attempting to extol the medicinal benefits of chewing gum. Wrigley claims that it can protect against the symptoms of heartburn, ear pressure and a dry mouth – and of course is good for the teeth. Schroders Expert 1st quarter 2011 | 3 Markets Two-speed world Over the next six months, our forecast for the global economy can be best described as a “two speed world”. The emerging markets are leading the economic recovery. In contrast, we forecast sub-trend growth in the major OECD economies, as the de-leveraging process continues to temper consumer spending. Experts expect robust growth of 6.2% in the emerging impact of fiscal tightening. Rate hikes are not In addition, valuations of emerging equities are markets this year. This means emerging markets will expected in the US or the eurozone until the spring looking more extended. In contrast, we have moved contribute more than half of forecast global growth of 2012. In the UK, we are expecting a rate rise before to an overweight on the US – valuations here are of 3.6%. In contrast, we forecast sub-trend growth in the end of the year, as inflation is significantly higher attractive, earnings upgrades are strong and the major OECD countries over the next two years, than in the US and the eurozone at over 3%. Over in corporate confidence is improving, which is reflected as the deleveraging process continues to temper the emerging world, policy is also expected to tighten in M&A activity. Meanwhile, we have moved to consumer spending and fiscal deficit reduction more rapidly in response to inflationary pressures a moderate overweight in Japan, as the yen has begins in some countries through higher taxes. and concerns about asset price bubbles. China is stabilized and valuations are attractive. Moreover, In 2011 we are expecting higher taxes, primarily forecast to raise interest rates in 2011 and allow Japan is not as directly impacted by developments in driven by Europe. Developments in the eurozone as modest appreciation of the RMB. the eurozone. a whole present more of a headwind than a following In the bond sector, we are neutral overall; wind for the world economy. Here, too, growth is Asset allocation we remain positive on high yield and negative on two-speed. Germany is the only developed nation We are increasing our overweight exposure in government bonds. Inflation is expected to stay going through a ‘V-shaped’ recovery, and there has equities within our asset allocation. The valuation of subdued, except in emerging markets, and private been a sharp recovery in consumer confidence across equities looks attractive, and we are currently in sector demand for credit is still very low, although Central and Northern Europe. However, Southern a recovery phase of the economic cycle where there are signs that activity is strengthening. As long Europe and Ireland are seeing weak growth and equities tend to outperform other asset classes. as policy rates remain as low as they are now, the almost non-existent consumer confidence. There has also been a very strong recovery in search for yield will remain the dominant theme for We do not believe that the euro crisis is over. corporate earnings, with an increase of over bond investors. Concerns over the solvency of several eurozone 50% in the US last year. M&A (mergers and countries are likely to flare up throughout the year, acquisitions) activity has also recovered somewhat, although the worst should be contained by EU and and quantitative easing is also supportive of equities. IMF support. We expect the euro to remain intact in We have upgraded Europe (ex UK) from underweight 2011. On a five-year view, however, we could see to neutral, given that concerns about sovereign debt some peripheral nations leave the single currency, look to have been priced in. Peripheral Europe looks if no steps towards a common economic and tax relatively bleak, but Germany and other Northern policy are taken. Europe markets are going through a strong recovery. We expect monetary policy to remain loose in In comparison, we have reduced emerging markets 2011, particularly in industrialized nations, firstly to from overweight to neutral – while economic growth maintain growth and secondly to accommodate the rates are robust, inflation is weighing on the region. BIP 8 Schroders forecast and Portfolio1 6 5,7 GDP growth in % 4 Inflation in % Key rates in % Currencies/oil price 7 6 2,7 2.00 Current 12/2011(e) 12/ 2012(e) 2 1,6 1.80 6 6.0 5 1,5 1.75 0 4.5 1.60 USD/EUR 1.32 1.25 1.20 4 5 1.40 –2 3 1.25 1.20 USD/GBP 1.55 1.60 1.60 4 2.1 3.5 2 1.00 3 –4 0.9 2.7 1 0.80 JPY/USD 84.0 85.0 90.0 0.8 0.60 2 1.8 –6 0 1.5 2009 2010 –0.2 2011 0.40 GBP/EUR 0.85 0.78 0.75 1 –1 0.25 0.20 USA Euroraum Japan Schwellenländer Oil (Brent Crude) 0 –2 0.00 91.8 84.5 87.1 2010 2011(e) 2012(e) 2010 2011(e) 2012(e) 2010 2011(e) 2012(e) in USD US Eurozone Japan Emerging markets World Weighting of asset classes since June 2010 Equity allocation (current) 100% Absolute Return 3.0% Convertible bonds 3.2% Equities comprise 41.1% of the total allocation 80% and break down as follows: Private Equity 2.3% Infrastructure 6.0% Equities, global 38.20% (–0.45%) 60% Cash & equivalents 5.0% Equities, US 18.49% (+6.66%) Corporate bonds (investment grade) 1.0% Equities, emerging markets 11.68% (0.33%) 40% High-yield bonds 14.3% Equities, UK 9.73% (–1.38%) Emerging market bonds 11.9% Equities, Pacific (ex Japan) 12.41% (–0.39%) 20% Commodities 9.0% Equities, Europe (ex UK) 9.25% (+5.01%) Property 3.2% Equities, Japan 0.00% (±0.00%) Equities 41.1% 0% 06/10 07/10 08/10 09/10 10/10 11/10 1 Source: Schroders, Datastream, IMF. Data for GDP, inflation, policy rates and market prices at 31 December 2010. Key figures for 2011 (e) and 2012 (e) are estimated figures for the year-end. Emerging markets comprise Argentina, Brazil, Bulgaria, Chile, China, Colombia, Croatia, the Czech Republic, Estonia, Hungary, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Peru, the Philippines, Poland, Romania, Russia, Slovakia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela. Asset allocation (total and equities) refers to the Strategic Solutions – Schroder Global Diversified Growth Fund portfolio. Data correct as at 30 November 2010. 4 | Schroders Expert 1st quarter 2011 Markets Go West! Ticker Equities Despite ongoing concerns about the strength and durability of the US recovery, there are plenty of reasons to remain optimistic on the US Strong corporate balance sheets, outlook for corporate America in 2011. mergers & acquisitions increasing, loose monetary policy, weak US dollar positive Ironically, many US companies have had a “good” labour markets. On housing, we are very much of for large global companies. recession, having cut costs and restructured early the view that the market should not get markedly Schroder ISF US All Cap in the downturn, enabling them to enjoy strong worse in 2011. Indeed, in the second half of the Europe Weak growth prospects due to productivity gains. This has in turn allowed US year we think there is a good possibility that it structural debt issues, but strong companies to benefit from a strong pickup in free could move forward quite positively as the resurgence in Germany and Northern cash flow and profits as economic conditions have currently high levels of inventory begin to clear. Europe; much of the bad news priced in. Schroder ISF European Special Situations improved. Aside from these “self help” measures, Broadly, we would expect the housing market to large US companies with a global reach are well have a neutral to slightly positive impact on Japan The yen looks to have stabilised, positioned to benefit growth in 2011. which is positive for exports; Japan is notdirectly affected by the problems in from strong rates of The labour markets the eurozone. Foto: fotolia economic growth in are likely to be Schroder ISF Japanese Equity Alpha countries such as China key in determining Paciﬁc (ex Japan) Loose US monetary and India. Indeed, for consumer confidence and policy is positive as it boosts liquidity in some US firms, emerging behaviour in 2011. the region; close ties with China mean markets now account for It is encouraging that that further policy tightening could a third to a half of all temporary employment hamper market returns. revenues – which makes has already started to Schroder ISF Paciﬁc Equity them a growth driver for pick up. Obviously the Emerging markets Currently enjoys the US as well. debate about how to the best growth prospects due to strong kickstart employment will structural fundamentals including trade Why do investors continue and the surplus positions; but valuations are choose to invest in Obama administration now extended. the US? undoubtedly paid a penalty Schroder ISF Global Emerging Market Irrespective of crises and at the mid-term elections Opportunities economic cycles, US for its perceived failings companies are often the here, but overall we Fixed income recognised leaders and believe the worst is Government Central banks are expected innovators in their behind us now. to keep policy rates low against a low respective fields. This inflationary backdrop; the fact that the world applies both to “old” Preferred sectors economy is on a sustainable growth path is sectors, such as healthcare, While we don’t seek to putting government bond yields under defence and aerospace, take large sector positions, increasing pressure. and to “new” ones, such as internet and we do have our favourites. Areas such as energy Schroder ISF US Global Bond communications technology. These companies and industrials present us with plenty of investment Investment Grade (IG) Corporate With also operate in a society which encourages rather ideas at present, and diversified financials is also an yields on government bonds persistently low, than hinders entrepreneurship. It is difficult, for interesting sector at the moment. Valuations are IG bonds remain a high-yielding alternative; instance, to envisage businesses such as Apple, attractive and the market is assuming – incorrectly however, valuations have extended. Schroder ISF Global Corporate Bond Microsoft, Google or Facebook emanating from in our view – that profits won’t recover to anything anywhere other than the US and becoming so near the levels seen in the last decade. There is High yield The general recovery in corporate profits is supportive. successful. That won’t change in 2011 or indeed at potential for positive surprises here and this is the Schroder ISF Global High Yield any point in the foreseeable future. “growth gap” that we seek to exploit. More generally, while US large cap equities are no longer as cheap Emerging market debt Many emerging sovereign issuers have a domestic M&A revival as they once were, they are far from being economy in better fiscal shape than their The recovery in M&A is very positive. Many US expensive. On a 12-month forward PE, the S&P is developed peers. However, the contraction companies are generating large profits, have solid only on 13 times earnings. That compares in sovereign spreads suggests that balance sheets and barely any gearing. favourably with its long-term average. valuations for some countries are trading Some companies are using their free cash flow for towards the more expensive end. capital expenditure to enhance their own Monetary policy needs to balance risks Schroder ISF Emerging Markets Debt competitiveness. However, others are using that The Fed will continue its $600bn bond purchase Absolute Return cash to make acquisitions that are immediately programme (i.e. quantitative easing or QE) until Index-linked We expect global inflation to accretive to earnings. To put it another way, July 2011 and is unlikely to tighten policy any time remain subdued, except in the UK. companies can either use their free cash to invest soon. It is important that it exits from QE at the Schroder ISF Global Inflation Linked Bond and make acquisitions or they can leave it on right time to balance the risks to growth on one deposit where it will earn around a quarter of side with the obvious inflation risk on the other. Alternative investments one per cent. In our view, that is not a particularly The Fed’s current policy is pushing the dollar Property Valuations are fair relative to difficult decision if a company wants to boost down. A weaker dollar will boost US companies’ history and other assets; growth prospects its earnings. exports. But this runs the risk of encouraging are limited. protectionism and currency devaluations by other Schroder ISF Global Property Securities Has the recession fundamentally altered nations if the dollar is perceived to be artificially Commodities The world economy is the propensity to spend? weak, which would harm US exports. recovering and there is sufficient liquidity; While we have to recognise the consumer as a risk, US companies are still benefiting from the weak strong demand from emerging markets. it is worth remembering that it is the wealthier dollar currently, but there are two sides to sections of US society that drive consumption. this coin. These wealthier consumers have been less affected Expected performance: by the downturn and continue to spend. As far as Positive Neutral Negative the outlook for consumers in general is concerned, two issues will be crucial in 2011: housing and Schroders Expert 1st quarter 2011 | 5 Special feature “We only have one chance” Sir David King Sir David’s area of expertise Sir David King is director of the Smith School of Enterprise and Environment is physical chemistry, with a particular interest in at the University of Oxford. As a guest of the Schroders Secular Market Forum, climate change. He was he shared his thoughts on climate change and the challenge posed by the chief scientific advisor to depletion of the world’s natural resources. the British government from 2000 to 2007. The legacy of population growth Food supply The human race has a track record of mismanaging Given the need to increase food production, we need the earth’s natural resources, as illustrated by the to be far smarter about capacity per hectare than we conventional oil reserves are in the hands of destruction of China’s Loess valley ecosystem during have been. This means farming efficiently, soil international oil companies – 85% resides in the hands the 1400s. Overfarming resulted in extensive top soil management and the implementation of crop of national companies. The concentration of oil and erosion and sand clouds that still impact Beijing, development techniques. After 15 years of research mineral resources in certain nations and the Korea and Japan today. At that time, the solution was and sophisticated selective breeding we have consequent potential for conflict is very concerning. to relocate to a more fertile region. Clearly, with developed the means to grow flood-resistant rice We therefore need to look at alternatives, e.g. a global population of 6.8 billion people, this option crops. The same result could have been achieved more unconventional oils (such as tar sand oil), of which is not open to us today. rapidly with the use of genetic modification there is a vast supply, but significant difficulties techniques. However, the European aversion to associated with their use. Indeed, demand trends are Unique challenges GM crops is holding back the commercial application already pushing international oil companies into The level and density of the global population of these new methods. But to meet the rising demand unconventional oil production far too quickly. presents major challenges that are all interconnected. for food, these techniques are essential. The technology In other words, beyond the boundaries appropriate is available to provide flood-resistant, drought- for the technology that currently exists. The key Water resistant and saline-resistant crops, but the social message is that we need to remove our dependency on Without managing our supplies more effectively, acceptability of genetic modification has not kept fossil fuels as quickly as possible. If we don’t succeed in the world is set to face a global freshwater shortage pace. Wealth creation in the developing economies doing so, we look set to face an oil price crisis with the by mid century. Shortages are already appearing is increasing meat consumption, which necessitates potential to trigger another financial shock. Our oil on a regional level, with the “green belt” of further crop production and results in greater water production processes to date have been simple and Australia a prime example. Traditionally a significant consumption. Fish consumption per head has wasteful given the perception of oil as a cheap area for crop production, increased and massive commodity. Data from Cambridge University highlights the state of Victoria has faced “Some eminent cosmologists think that overfishing means that there massive inefficiencies in the current conversion rate eight successive years of the future for humanity is to get into a could be no more large fish in from primary energy to total useful energy (of the drought, such that one third of spaceship and find another planet, but the oceans by the total primary energy burnt globally per annum, only domestic water is sourced that planet will not have the right levels mid-21st century. Recent 12% is produced as “useful energy”). In this sense we through desalination. However, of ecosystem services that this planet experiments to establish are facing one of the greatest innovation and wealth desalination is a highly energy- provides. We only have one chance.” fishing protection zones (such creation challenges since the beginning of the intensive production process, as in the Cape Cod region) industrial revolution. There are massive opportunities which is often fuelled by coal. The burning of coal not have been proven to work and should be replicated on for energy efficiency gains and for finding alternative only creates energy supply and security concerns, but a larger scale elsewhere in the world. means of energy production, but these also present also contributes to climate change and desertification. huge technical and economic challenges. We haven’t yet mastered solar-powered desalination, Climate change but this would be a big win going forward. The temperature of the earth went through Successful environmental management a maximum 50 million years ago, at around 12 degrees To come full circle, it is worth returning to China’s Health higher than pre-industrial temperatures. Greenhouse Loess plateau. Twelve years ago, the Chinese Climate change also poses a challenge for health, gas levels were significant at that time. A large government began replanting the area on an enormous in the sense that diseases are moving to new locations proportion of these gases were absorbed by the oceans, scale. To date, an area the size of Belgium has been as temperatures rise. Furthermore, an increasingly forests and permafrost over millions of years. regreened, with the full plateau (approximately the globalised economy means that air travel can The development of civilisation in the past 12,000 size of France) set to be regreened by 2020. facilitate the spread of a new infectious disease to the years, with the introduction of farming processes and The terracing of the area and the creation of arable rest of the world within three months. deforestation, has been accompanied by another land has been a source of wealth creation for the local significant increase in greenhouse gas emissions. farmers, and other biodiverse systems are returning. Minerals Greenhouse gases have risen from the 275 parts per This is an astonishing example of effective Dwindling resources and the uneven distribution of million (ppm) typically seen during a “warm” period land management. resources around the world create both economic and (as opposed to an ice age) to 388ppm today, and are political challenges. Estimated copper reserves, for still rising at 2ppm per year. However, we have not yet Where now? example, would be exhausted in 50 years if current seen a corresponding increase in temperature levels, The financial crisis has provided somewhat of consumption trends are extrapolated. Demand with the global average only about 0.8°C higher. While a breather for the environment by reducing the continues to grow, however, notably from China. greenhouse gases are by no means the only factor volume of emissions produced globally. However, Its resource needs cannot be met internally and Africa behind temperature rises, they are a significant business as usual will put us back on a dangerous is proving an important investment destination. contributor. According to data from the Hadley track. Encouragingly, the Copenhagen and Cancun This has parallels with the European colonisation of Centre, if we reach 450ppm there is a 20% chance that climate change conferences and the surrounding Africa during the Industrial Revolution. the global temperature will rise by over 3.5°C – publicity led to over 70 countries announcing their significantly beyond the global agreement to commitment to tackling climate change. These nations Ecosystems prevent a temperature rise greater than 2°C. If we currently account for 85% of greenhouse gas Given the important role forests play in absorbing follow a business-as-usual path and levels exceed emissions. Whilst much more needs to be done in carbon dioxide from the atmosphere and providing 650ppm, a rise of over 3.5°C becomes the most likely terms of effectively managing our resources, this the biodiversity necessary for human survival, there outcome. We need to prevent this, since the melting of widespread international recognition sets us off is a conflict of interest with food production. the Greenland ice sheet alone would result in a six a good start. Food production needs to increase by 50% within metre rise in sea levels around the world. 15 years to satisfy current growing demand. The challenge is whether this demand can be met Energy security and supply without removing the ecosystems on which we rely The production capacity associated with conventional (which is what is happening at the moment). oil is not sufficient to meet rising demand. Furthermore, only around 15% of the remaining 6 | Schroders Expert 1st quarter 2011 News Notices Award winner Schroder ISF Global Morningstar 1 Schroders is further expanding its range of 20 emerging market equity funds Climate Change Equity / with Schroder ISF Frontier Markets Equity (ISIN A, USD, acc.: LU0562313402). The fund was launched in December 2010 and is authorised for immediate sale The investment story in the Nordic countries. The fund seeks to benefit from the dynamic growth of Greenhouse gases are threatening the earth’s ecosystem. Governments and countries on the threshold of becoming established emerging markets – “frontier business are attempting to avert the worst consequences of global warming and at markets” whose equity markets are still relatively small and illiquid, but have the least mitigate damage that is already unavoidable. The transition to a low-carbon potential for dynamic growth. These include Kuwait, Qatar, the United Arab economy will have consequences for companies and their competitive Emirates, Argentina, Nigeria and Pakistan. The Middle East accounts for around environment. New technologies will be created, patterns of demand will change and environmental costs will rise. Companies which adjust flexibly to change or 60% of the MSCI Frontier Markets Index, which is the fund’s benchmark. The contribute to combating global warming themselves could turn the industrial fund is managed from Dubai by Rami Sidani, head of the Middle East and Africa revolution of the 21st century to their own advantage. region and co-fund manager of Schroder ISF Middle East. The fund New benchmark: Since the beginning of the year the MSCI World TR Net has Schroder ISF Global Climate Change Equity opens up the opportunities of the new replaced the MSCI All Countries World TR Net as the benchmark for Schroder industrial revolution to investors. It invests in stocks of companies whose products ISF Global Equity Yield (ISIN A, USD, acc.: LU0225284248) and Schroder ISF or services help to limit the impact of global warming or adapt to unavoidable Global Dividend Maximiser (ISIN A, USD, acc.: LU0306806265). The MSCI changes. Limiting the impact of global warming comprises solutions such as higher World TR Net is the benchmark generally used by both funds’ peer group and energy efficiency, reduced dependence on coal and oil, and the development of better reflects their portfolios. The previous benchmark contained 22 emerging renewable energies and of carbon dioxide capture and storage technology. markets which do not feature in the fund portfolios or only play a limited role. Adapting to change involves strategies to alleviate the consequences of harvest failures, deforestation, water shortages, floods and damage to fragile ecosystems. Change of fund manager: Schroder ISF Strategic Bond (ISIN A, USD, acc.: LU0201322137) and Schroder ISF Global Bond (ISIN A, USD, acc.: Performance since launch (29 June 2007) 2 LU0106256372) have been managed by Bhupinder Bahra and Frederick Bourgoin Return (USD) in % since the beginning of 2011. Bhupinder Bahra is a quantitative research specialist 50% 42.76% with 17 years’ investment experience. Frederick Bourgoin is also a quantitative 40% 29.99% bond analyst. Both joined Schroders’ quantitative bond team as analysts in 2006 30% 20% and have been managing Schroder ISF Global Inflation Linked Bond (A, EUR, 9.50% 11.76% 10% 4.03% acc.: LU018781048) since the beginning of the year, together with David Scammell. 0% –0.12 % David is Head of UK & European Interest Rate Strategies, and has 21 years’ –10% investment experience. Nick Gartside, the fund’s previous manager, left Schroders –20% –30% in December 2010. –40% –44.77% –40.71% –50% 06/2007–12/2007 12/2007–12/2008 12/2008–12/2009 12/2009–12/2010 History of Schroders Schroder ISF Global Climate Change Equity, A, USD, acc. MSCI World Net Return (USD) Baron Sir John Henry Schröder ISIN LU0302445910 (A class, USD, acc.) Eldest son and heir to Johann Heinrich, Investment risks John Henry Schröder was born in S chroder ISF Global Climate Change Equity invests in stockmarkets worldwide Hamburg in 1825. He entered the firm and is therefore exposed to corresponding volatility. in London in 1841, aged sixteen, Th e fund can also invest in emerging markets and smaller companies with becoming a partner in 1849. He took higher risks. The fund does not offer capital any protection. British citizenship in 1864 but maintained Th e value of the units in the fund may at any time fall below the price that the strong links with Hamburg. Together with investor paid for the units, resulting in losses. his father he turned J. Henry Schröder & Th e fund may use financial derivatives as part of the investment process. Co. from a prosperous Anglo-German This may increase the fund’s volatility by increasing the impact of market events. Baron Sir John Henry Schröder, trading company into a prominent I nvesting in the USD unit class carries currency risks for EUR investors. 1825–1910 merchant bank. Asset Manager of the Year Schroders was named European Asset Management Company of the year at the Funds Europe Awards in December 2010 for the second year in a row – beating 1 Source: Morningstar. Data as at 31 December 2010. 2 Source: Schroders. Data as at Aberdeen, Amundi, Carmignac and RCM in the process. In 31 December 2010. Performance based on unit class A, USD, acc. Calculation based on addition, and also for the second year in a row, the Funds reinvestment of all income and net of annual management fee, but does not include the initial fee, or any other fees, charges, transaction costs or taxes, which would have a Europe jury awarded Schroders the prize for the best European marketing campaign negative impact on the performance figure if included. The fund is also available in unit class of the year (for Schroder ISF Emerging Markets Debt Absolute Return). A, hedged in EUR, acc. (ISIN LU0306804302). Foreign currency investments are subject to currency fluctuations. Past performance is not a reliable indicator of future performance. Publishing information Important Information Published by: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund Schroder Investment Management A/S, (the “Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for Store Strandstræde 21, 2nd shares of the Company can only be made on the basis of their latest prospectus together with the latest audited annual report (and subsequent unaudited DK-1255 Copenhagen. semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. Investors need to read the prospectus carefully before Editors: investing. An investment in the Companies entails risks, which are fully described in their prospectus. Past performance is not a reliable indicator of Lars K. Jelgren (responsible). future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. 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Schroders Expert 1st quarter 2011 | 7 Service Frontier Markets see Political Unrest What effect will revolutions, massive festering problems are its very own. The king has of KD 1000 and free food for every citizen in demonstrations and political unrest agreed to some concessions and is freeing prominent celebration of the nation’s anniversary. Oman has mean for stock markets in the affected political prisoners. We believe compromises will be raised the minimum wage for its citizens. made and a solution should be reached shortly. In Saudi Arabia, the king has announced countries and regions? Down 20%? Protests have also spread to places like Yemen, USD 35bn worth of spending measures after Or even worse? Algeria and Libya. One should keep in mind that returning from three months abroad for medical these countries are not part of the GCC, nor are their treatment. This includes increased support for small Well, looking at the Frontier Markets from mid economies integrated within the Gulf. These remain businesses and education of low income families and December 2010 to end of February 2011, to the extremely closed economies, accessed with difficulty students studying abroad. The king is very popular surprise of many the drop was only around 8%. and where FDI levels continue to be low. In Yemen and his reforms measures taken over the past decade Apparently these kinds of events are to a great extend President Ali Abdullah Saleh has agreed not to run have not gone unnoticed. However, there is a Day of already calculated into the market pricing. But what is for re-elections, and in Algeria the government has Rage being called for March 11th and whilst support happening in the Middle East and North Africa area? agreed to abolish a 19 years old emergency law, is expected to be low, surprises, as we have seen, are The ousting of President Mubarak is proving caving to the protests on the street. perfectly possible. A strong turn-out at the rally will to be a pivotal moment for the MENA region with In Syria: There have been press reports of efforts to certainly lead to a significant increase in uncertainty events in Egypt rapidly spreading over to organise protests, but as yet major demonstrations with an obvious impact on the oil price and global neighbouring countries. have not materialised. stock markets. In Bahrain: several tens of thousands of supporters Libya is catching the world’s attention right now In the medium to longer term, political liberalisation of the Shiite led opposition have poured into the and it is difficult at this stage to gauge how the across the region should be a strong positive. In the streets of Manama calling for the devolution of some revolution will end. It seems that more bloodshed is short term there remains a high degree of uncertainty power from the palace to the elected parliament. to come before the regime either collapses or reaches and further volatility is likely. If protests do not The protests do not come as a surprise and tensions a compromise. What we do know is that the conflict materialise in Saudi some very interesting buy have been building for years between the ruling will remain within Libyan boarders but could very opportunities should fairly quickly materialise. It is Sunni family and the shi’a population (70% of well drag. relatively difficult to get access to these markets and populace). It is important to note this is not driven by Regional governments will be pushing ahead with an efficient way of doing that is by using the hunger but by demands for more empowerment to reforms and more welfare distribution measures. Schroder ISF Frontier Markets Equity Fund. an oppressed majority and that Bahrain’s long Kuwait for example has already announced the grant Top M1 rating awarded by Fitch Ratings The renowned rating agency Fitch awarded Schroders business franchise in a controlled manner, building on In Fitch’s view, asset management companies which its highest Asset Manager rating of M1 in December a diversified product and client mix under challenging have the M1 rating are less vulnerable to make 2010. Among the 21 rated asset management market conditions. Fitch noted in particular the mistakes in investment and functional areas. The M1 companies worldwide, Schroders is the only traditional turnaround achieved in rebuilding the institutional rating awarded to Schroders also reflects the company’s asset manager with an M1.1 Previously, Schroders had business over the past two years. The institutional long history and independence, as well as its high the second-highest rating of M2+. The rating covers all assets under management have increased by 64% since profitability and liquidity, which ensures a solid London-based investment activities of the company end-2008. According to Fitch, the recent evolution of financing of all financial investment resources. with the exception of the alternative asset management the company has been particularly supported by the This includes a large and strong team of experienced business. Fitch is an important international rating enhanced risk management organisational framework, investment experts, an effective, analytical investment agency alongside Moody’s, Standard & Poor’s and which operated effectively in 2010. The rating action process, robust risk management and a solid Morningstar. The main driver for the rating upgrade also recognized the ability of the company to deal with technological investment infrastructure. was Schroders’ proven capacity to grow its robust new business complexities and strong net inflows. Who we are 1 Source: Fitch Ratings. Data as at 31 December 2010. Viggo Johansen, Lars K. Jelgren, Ketil Petersen, Head of Institutional Sales, Nordic Head of Intermediary Sales, Nordic Country Head Nordic Region Sweden, Finland Direct phone: +45 3373 4891 Direct phone: +45 3373 4899 Direct phone: +46 8 545 136 65 Mobile: +45 2212 8822 Mobile: +45 5120 8079 Mobile: +46 70 678 55 30 Sweden direct phone: +46 70 678 55 30 Email: firstname.lastname@example.org Email: email@example.com Email: firstname.lastname@example.org Lykke Jensen, Peter Johansen, Victor Rozental, Chief Operational Officer Senior Institutional Sales Intermediary Sales Direct phone: +45 3373 4898 Direct phone: +45 3373 4896 Direct phone: +46 8 545 136 62 Mobile: +45 2410 2667 Mobile: +45 4080 2843 Mobile: +46 70 853 1922 Email: email@example.com Email: firstname.lastname@example.org Email: email@example.com Ubbe Strihagen, Dorthe Kjærulf, Marianne Pedersen, Director, Property Sales Client Service Executive Business Manager Direct phone: +46 8 545 136 66 Direct phone: +45 3373 4895 Direct phone: +45 3315 1822 Mobile: +46 70 520 33 80 Mobile: +45 2073 1020 Email: firstname.lastname@example.org Email: email@example.com Email: firstname.lastname@example.org Visiting Adresses Store Strandstraede 21, 2nd Sveavägen 9, 15th DK-1255 Copenhagen K Phone: +45 3315 1822 SE-111 57 Stockholm Phone: +46 8 678 40 10 We’re here to help you. Fax: +45 3315 0650 Fax: +46 8 678 44 10 www.schroders.com/dk www.schroders.com/se
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