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Schroder GAIA Egerton Equity

Quarterly Fund Update
Second Quarter 2017

Portfolio characteristics Portfolio structure

Fund manager John Armitage (Egerton) Gross/net exposure (%)
Long Equities 101.0
Managed fund since 25 November 2009
Short Equities -49.2
Fund launch date 25 November 2009 Total gross exposure 150.2
Total net exposure 51.8
Fund benchmark* MSCI World TR Net (local currencies)
Options (delta-adjusted) 0.0
Fund size 1,261 million Total gross exposure (delta-adjusted) 150.2

Ongoing charge** 1.68% Total net exposure (delta-adjusted) 51.8

Number of positions*
Performance fee 20% excess return above EONIA +
Long 51
1% subject to a High Water Mark
Short 84
Source: Schroders, as at 30 June 2017.
*Please note the fund is benchmark unconstrained; index returns are Source: Schroders as at 30 June 2017. Figures are on a delta-
provided for reporting purposes only. **The ongoing charges figure adjusted basis.*Excluding index options and government bonds.
is as at June 2017 and may vary from year to year for the C Acc EUR
share class.

Discrete monthly returns since inception (%)

C accumulation shares (EUR)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year*
2017 2.6 1.6 1.2 2.9 3.6 -1.0 - - - - - - 11.3
2016 -4.3 -2.5 1.8 -2.1 3.6 -3.6 2.7 0.4 0.8 -1.7 0.8 0.7 -3.7
2015 0.9 1.7 1.0 -1.2 2.8 -0.4 4.3 -2.4 -1.7 3.6 0.3 -0.8 8.3
2014 -2.6 3.0 -2.1 -1.5 2.1 0.0 -1.0 2.1 0.0 1.2 2.0 0.3 3.4
2013 2.5 2.9 2.8 0.5 3.3 0.1 2.6 -2.7 2.5 1.8 2.5 2.6 23.3
2012 2.6 3.6 2.2 -0.0 -2.6 1.3 1.0 0.2 1.4 -0.6 2.3 0.2 12.0
2011 -2.0 2.0 -1.4 1.2 -0.2 -0.4 -0.2 -3.4 -1.8 3.5 -0.4 -1.1 -4.2
2010 -2.9 0.8 5.2 -0.0 -2.9 0.2 2.6 -0.7 4.7 3.2 -0.0 3.6 14.4
2009 - - - - - - - - - - -1.1 2.9 1.8
Source: Schroders as at 30 June 2017. NAV to NAV, net of fees. Fund launch date: 25 November 2009. *Year-to-date performance is shown for
years where monthly returns are not displayed for the full year.

Cumulative returns to 30 June 2017 (%)

C accumulation shares (EUR)
90 3 months 1 year 3 years
50 GAIA Egerton 5.5 15.3 21.4 84.6

10 MSCI World
TR Net (local 2.7 18.8 25.4 108.9
3 months 1 year 3 years Since launch
Portfolio Index Source: Schroders as at 30 June 2017. NAV to NAV, net of fees.
Fund launch date: 25 November 2009.

Schroder GAIA Egerton Equity Second Quarter 2017 1

What happened in the market
Markets continued to be relatively benign in the quarter, trending higher with few pullbacks. Global economic trends were
relatively positive, with better conditions in Europe, emerging markets and Japan, although in the US hard (i.e. output) data
continued to lag soft (i.e. confidence). Nominal growth, however, remained very low. Political trends were relatively
favourable in Europe, with French presidential candidate Emmanuel Macrons clean sweep into government under the
promise of tackling public finances and restrictive labour laws, both of which have been holding back growth

The funds return was relatively favourable, because of good stock selection. Its focus on owning companies with relative
earnings visibility was beneficial.

Stock highlights
The fund owned Airbus through 2013 and most of 2014, and sold the remainder of its position at the end of 2014. We re-
purchased the stock in April 2015, and feel that the company is significantly undervalued.

Airbuss Commercial division generates 80% of Group EBIT, with the remainder split between Defence and Helicopters.
Commercial is responsible for the manufacturing and delivery of the A320 (Airbuss flagship narrow-body platform), A330,
A350 and the A380 wide-body (or twin-aisle) aircraft. The company has a backlog of more than 6,700 aircraft, or the
equivalent of more than nine years of production at current delivery rates. Rising A320 production rates and better mix,
improved profitability on the A350 (which is heavily loss-making, because it is in ramp-up) and more favourable FX hedge
rates, should allow Commercial to double its EBIT at least between 2016 and 2020. The A320 accounts for 80% of total
Airbus deliveries and its production will rise from 47 per month in 2016 to 60 in 2020 at which rate it remains overbooked.
Profitability on this programme is likely to improve after 2018, as higher-priced A320NEOs become a greater portion of
output, and as launch pricing discounts on early NEO orders begin to fade. Rising volumes of the larger, more profitable
A321 variants should also boost margins. The A321 dominates its niche, with an 80% share, and is an increasingly popular
plane as airlines opt to fly larger narrow-body aircraft for longer distances, at the expense of wide-bodies.

Margins in Airbus Commercial are currently depressed by the cost of developing and ramping the A350XWB, losses from
which are largely expensed (rather than capitalised) and will reach 2% of revenues (or 1bn) in 2017. Airbus aims to hit
break-even on the A350 by the end of the decade, and management commentary on this has become increasingly

We met the head of the programme at the Paris Air Show, who was confident not only that it was progressing smoothly
down the learning curve (and is thus on-track to hit break-even by 2020). But, importantly, they felt that it can achieve gross
margins above those of the A330 family (which are high-teens), as a result of lower recurring costs and better prices. If
Airbus can sell 105 A350s per annum at a 15% margin, the programme would earn c.2.3bn of EBIT (more than 50% of
Group EBIT today), i.e. this currently loss-making product should be a large growth driver over the next five years.

The A380 deliveries will drop from 28 per year in 2016 to 12 per year by 2018. Management is confident that Airbus can
absorb the additional losses stemming from lower output by shifting production from other aircraft programmes to existing
A380 sites.

The plane has been a troublesome programme since its inception. It was planned and designed when Airbus was a poorly
managed, dysfunctional set of national aerospace companies, rather than the well-run entity it has become under the
current generation of management. Also, airlines are not yet sufficiently slot-constrained to be forced to buy such a high-
priced plane (despite its appeal to consumers).

Airbus is a euro-based company in a dollar-denominated industry, and so will be a significant beneficiary of dollar
appreciation since 2014. It is using this to lock in more attractive hedge rates than those prevailing over the next three
years. The company has close to $100bn of FX hedges (mainly via forwards) at an average /$ rate of 1.25. Its effective
hedge rate was /$ 1.32 in 2016 and will be /$ 1.29 in 2017. We forecast that its realised rate will trend to /$ 1.22 in 2020,
providing a FX boost to earnings of close to 1.4bn.

The company has, and needs, a strong balance-sheet, with net cash of close to 10bn. It should be a major cash-generator
once losses on the A350 begin to decline, and beyond 2020, since it is unlikely to launch a new narrow-body platform until
2025-2030, while the A350 will probably be on the market for 20 years. New product launches or variations would come
sooner, however, were engine manufacturers to generate significant innovations.

Airbus trades on 16.5x 2018 earnings (when A350 will lose the equivalent of 15% of Group EBIT). Its valuation drops down to
just 9x (on an ex-cash basis) by 2020 (before the impact of any share buyback), as the A350 breaks even, A320 volumes rise,
and FX rates improve.

Higher EPS than our base forecast is possible: pricing may improve by more than we conservatively forecast across the A320
and A330 programmes (which have been heavily penalised by launch discounts); the A350 could, as per management
comments, break even in 2019; and Airbus could repurchase 2bn of stock each year from 2018 and still maintain a rising
net cash balance. These sources of upside would take Airbus to a valuation of just 6.6x (ex-cash) by 2020.

Schroder GAIA Egerton Equity Second Quarter 2017 2

Airbuss equity story is clearly not without risk. The company is vulnerable to mis-execution on the A350, price competition,
a global slowdown in air travel, particularly in Asia/EMs, and dollar weakness (against which it can hedge but not fully
protect). However, we believe that its powerful, visible earnings drivers should generate significant gains in its shares

Ryanair has been a large holding of the fund for a long time and remains very attractive.

Ryanair carried 120mn passengers in 2016, or c.16% of the short-haul European market, on its fleet of 383 Boeing 737s. Its
current order book will take its fleet to 585 planes by 2023, when it expects to carry 210mn passengers, which would
represent c.8-9% per annum growth over the period.

The company's cost base is a significant competitive advantage. Ryanair's ex-fuel cost per passenger was just 27 in 2016, or
about half of easyJets, the other large European low cost carrier, and c.15-25% of legacy airlines such as British Airways, Air
France and Lufthansa.

These very low costs are driven by a variety of factors: the company buys aircraft counter-cyclically and in bulk, i.e. at very
low prices, and configures them to high seat densities; its workforce is highly productive and non-unionised; volume
growth; and it exploits the benefits its growth brings to airports by negotiating low charges and ensuring that they compete
for its traffic. Ryanairs unit costs fell by 5% in 2016, while they rose at other airlines.

Low costs enable low fares and Ryanairs average fare of just 40 represents a huge growth stimulant. 40% of European
short-haul flights are operated at an average cost to the airline of 3x Ryanairs average fare and 75% operates at an average
cost of 2x its average fare. As Ryanair grows profitably, at fares which its competitors cannot match, it seems likely that
these competitors will shrink further, and that prices will trend higher in periods when unit growth slows from its current
very fast rate. Ryanair carries so many passengers at such low yields that its earnings would be very geared to higher fares
(particularly since the Irish corporate tax rate is 12%).

Ryanair is now seeking to exploit the power of its online presence and the data it has, and will gain, on its customers. It has
the most visited airline website globally, since bookings are 100% direct and online, and over 50% of its unique customers
are members of its myRyanair loyalty programme, and has ramped up its IT effort, via the Ryanair Labs initiative, over the
last 5 years. It intends to grow ancillary income to 30% of revenues in 2020, versus 26% now, as better targeting and
analytics improve the cross-sell and up-sell of existing and new products. The incremental cost of ancillary revenues is low
and success here would yield either greater profits, or the ability to stimulate traffic further, with obvious long-term

Ryanair has a strong balance sheet, with net debt of just 200mn, and is very cashflow generative, despite its growth. It has
shrunk its share count by 11% over the last two years, and we believe will continue to do so (we forecast free cashflow at
c.50% of market cap over the next seven years).

The company would clearly be damaged by a major European recession, or by terrorism of a type which threatened air
travel, but would be likely to outperform its competitors in these circumstances.

Ryanair is an exceptional business with a durable competitive advantage, which will likely grow EBIT at double-digit rates
medium-term. Michael OLeary, its CEO, is outstanding, and as motivated as ever, despite the riches he has earned from
running the company (in which he holds 1bn of shares). The company trades on 13.5x our estimate of 2017 earnings,
which we feel is good value.

The fund bought shares in Praxair (PX), a global leader in industrial gases, in late Q3 2016 and has subsequently scaled up
the position; this was ahead of a merger with Linde, which was announced on 20 December 2016, and then formalised more
recently in a Business Combination Agreement, which was signed in June.

The deal is subject to a minimum 75% acceptance by Linde shareholders and anti-trust clearance. There is no break fee.

The merger will, if it takes effect, create the clear global leader in industrial gases (with pro-forma net sales, pre-disposals, of

The Business Combination Agreement contains projections from the two management teams of cost synergies of $1bn per
annum, and a further $200mn of recurring capex savings from optimising existing assets and from procurement synergies,
to be achieved within three years of deal closure. These will cost $1bn (inclusive of advisory fees).

PXs management has stated that these synergies should be achievable even if the disposal remedies required to satisfy
anti-trust authorities involve a maximum of $3.7bn of revenues/$1.1bn of EBITDA. Management views this remedy
assumption as clearly conservative/a worst case, and, should the combined business retain more assets, synergies might be
higher than their forecast.

PX has best-in-class management and has always controlled costs very tightly. Its headcount has dropped sequentially every
quarter for the past three years (excluding Q2 2016, after a small European CO2 gas acquisition), and an employee count of
26,420 contrasts with Lindes 59,715 (of which 52,907 is in the Gases division, and 6,432 in Engineering). Lindes greater

Schroder GAIA Egerton Equity Second Quarter 2017 3

exposure to its employee-intensive home-care gases business, Lincare, which employs 11,000, and to its cylinder gas
operations, explains some of the difference, but it is clear from this comparison that it can be managed much more tightly
under PX.

PX has best-in-class management and has always controlled costs very tightly. Its headcount has dropped sequentially every
quarter for the past three years (excluding Q2 2016, after a small European CO2 gas acquisition), and an employee count of
26,420 contrasts with Lindes 59,715 (of which 52,907 is in the Gases division, and 6,432 in Engineering). Lindes greater
exposure to its employee-intensive home-care gases business, Lincare, which employs 11,000, and to its cylinder gas
operations, explains some of the difference, but it is clear from this comparison that it can be managed much more tightly
under PX.

Linde had built a sprawling empire via the acquisitions of Aga, BOC and Lincare. It operates in more than 100 countries and
has a matrix management structure with various product area managers liaising with regional and country heads.
Improved accountability and better mid-management incentive structures should be able to drive substantial gains in
profitability. The case of Air Products may represent some sort of playbook for this approach. Seifi Ghasemi was brought in
as Chairman/CEO of Air Products, and his strategy of de-layering the organisation and linking mid-managements pay to the
profitability of the plants/operations they directly controlled helped to engineer a >600bp improvement in its EBITDA

Profits may also benefit from the refinancing, in time, of Lindes expensive debt, and, possibly, from lower tax rates.

More details on divestitures should be released prior to the launch of the exchange offer in September. We believe that the
proceeds from these divestments can surprise positively. There has been an extremely high level of interest in the assets
which may be for sale (according to management). PXs management highlighted to us that recent transaction multiples in
the industry of 14-15x EBITDA were achieved on assets of inferior quality to the units which PX/Linde will be selling.

Pro-forma ND/EBITDA of the group was 2.1x at end-2016. Legacy PX targeted ND/EBITDA of 2.5x and the enlarged and
more diversified group will aim for this at least. Likely net disposal proceeds of c.$9-11bn and very strong cashflow in the
coming years (capex will remain muted) will leave the merged group heavily over-capitalised and it is likely to embark on an
aggressive share repurchase if the deal is concluded as planned in Q3 2018. We see scope for a share buyback of more than
c.20% of the market cap from 2H 2018 until end of the decade.

We are excited by the potential upside from this merger. The CEO and CFO of PX, who will continue in their roles in the
merged company, are heavily incentivised and have stated on conference calls that they would not have proposed the
merger unless it created substantially more value for shareholders than PX standalone.

The merged company would trade on a P/E of less than 14x P/E post synergies and with 2.5x leverage, which we feel would
be undervalued for an asset base of this quality.

Outlook and strategy

European and Japanese economies are improving, while the US is solid, if subdued, although the absence of any take-off
here remains a disappointment. Yet powerful market indicators bond markets and oil indicate that inflation will remain
low. Overall, conditions seem broadly stable (outside the UK).

We are most influenced, as we assess the investing environment, by the fact that it is so hard for the average business to
generate nominal revenue growth in constant currency without M&A. To us, 5% organic growth revenue is now the
threshold that indicates that a company is advantaged or special in some way. Many companies cannot grow today, partly
because technology has a profoundly disinflationary/disruptive effect on most sectors, partly because the emerging market
cycle is muted, partly because the effect of low interest rates as a demand stimulant has now worked its way through the
economies, partly because their businesses are mature, and partly because commodities are either volatile or facing
disruption (oil/energy).

In an equity market in which mediocre or slow-growing businesses are valued on multiples of restructured or re-levered
earnings which seem high (to us) by past standards, we feel that the real value available to investors lies in protected
revenue growth, and most of the portfolio's holdings fall into this category. Its economy-sensitive holdings are confined to
airlines and financials (which we like because of their leverage to interest rates and the shift to a more benign regulatory
backdrop in the US).

Conversely, the funds shorts are dominated by the more challenged sectors of the economy.

The price, however, of a portfolio with greater than average revenue growth/visibility is likely to be its vulnerability to profit-
taking in the early stages of a market correction, because growth has outperformed the markets this year, led by
technology, and because many of the funds longs trade on high multiples (which we feel are deserved, but which might
correct were stocks to fall in a bond-driven sell-off), while some of its shorts are lower rated and less extended.

Another risk associated with high gross exposures which are not hedges of each other (i.e. long growth and short
stagnation/low quality) would be a period of rotation away from our key assumptions, or weak stock selection.

Finally, the portfolio would be vulnerable to a significant rally in the euro against the dollar, because of its large holdings of
Airbus and Safran.

Schroder GAIA Egerton Equity Second Quarter 2017 4

Performance attribution as at 30 June 2017*
Summary performance attribution Month (%) Quarter (%) Year to date (%)
Long Equity -0.2 8.4 20.6
Short Equity -0.7 -1.0 -4.2

Corporate bonds 0.0 0.0 0.0

Index options 0.0 0.0 0.2
FX Hedging 0.0 -0.3 -0.8

Total -0.9 7.0 15.7

Top 5 contributors Type Country Sector Quarter (%)

Ryanair Long Ireland Industrials 1.0
Safran Long France Industrials 0.6
Tencent Long China Information technology 0.5
Constellation Brands Long US Consumer staples 0.4
Activision Blizzard Long US Information technology 0.3

Bottom 5 contributors Type Country Sector Quarter (%)

Charter Communications Long US Consumer discretionary -0.3
Sberbank Long US Financials -0.3

Undisclosed Short US Industrials -0.2

Undisclosed Short US Financials -0.2
Undisclosed Short US Consumer discretionary -0.2

Region Month (%) Quarter (%) Year to date (%)

Europe ex UK 0.1 2.2 3.6
United Kingdom 0.3 0.8 1.8

North America -2.2 0.0 5.5

Pacific ex Japan -0.1 0.0 -0.5

Japan -0.1 -0.2 -0.1

Emerging Markets -0.1 -0.2 -0.6

Other (including FX Hedging, Options) 1.2 4.5 6.0

Total -0.9 7.0 15.7

Sector Month (%) Quarter (%) Year to date (%)

Consumer discretionary -1.3 -0.9 1.2
Consumer staples 0.2 0.2 0.5
Energy 0.1 0.3 0.2
Financials 0.3 0.0 0.9
Healthcare -0.1 0.0 -0.1
Industrials -0.3 1.8 2.8

Information technology -1.0 1.0 4.4

Materials -0.1 0.0 0.2

Telecoms 0.0 0.1 -0.3

Utilities 0.0 0.0 -0.1
Other (including FX Hedging, Options) 1.2 4.5 6.0

Total -0.9 7.0 15.7

Source: Schroders.
*Analysis expressed on a gross of fees basis using a total return methodology. The impact of any currency movement at security level is
reflected within each of the relevant strategies. All data is rounded to one decimal place; as such, any small discrepancies can be attributed
to this.

Schroder GAIA Egerton Equity Second Quarter 2017 5

Key positions as at 30 June 2017 (%)
Top 10 long positions
Holding Sector Weight

1 Airbus Industrials 6.2

2 Charter Communications Consumer discretionary 6.2

3 Comcast Consumer discretionary 5.1

4 Ryanair Industrials 5.0

5 Safran Industrials 4.7

6 S&P Financials 4.0

7 Activision Blizzard Information Technology 3.5

8 Constellation Brands Consumer Staples 3.4

9 Applied Materials Information Technology 3.3

10 London Stock Exchange Financials 3.3

Top 5 short positions Country allocation

Sector Country Weight Sector Net Weight (%)

1 Information technology US -1.7 US 34.0

2 Industrials US -1.7 France 9.0

3 Industrials US -1.5 Ireland 5.5

Consumer discretionary US Netherlands 2.5

4 -1.4

Consumer discretionary Hong Kong 2.2

5 Germany -1.3
Source: Schroders. Russian Federation 1.4

Canada 1.3
Portfolio positioning as at 30 June 2017 Japan 1.0
Sector allocation Switzerland 1.0

Sector Net Weight (%) Austria 0.9

Financials 21.4 Germany 0.5

Industrials 17.0 India 0.5

Norway -0.1
Information technology 14.4
Malaysia -0.2
Materials 3.7
UK -0.2
Consumer discretionary 2.6
Denmark -0.6
Real estate 2.4
Australia -0.9
Consumer staples 1.7 China -1.3

Utilities -0.3 South Africa -1.3

Telecommunication services -3.2 Sweden -3.2

Healthcare -3.6 Index options 0.0

Total** 69.2
Energy -4.4
Source: Schroders. Analysis based on market exposure as a
Total* 69.2 percentage of total fund size excluding currency forward
*Includes cash and cash equivalents exposure of 17.3%.
**Includes cash and cash equivalents exposure of 17.3%.

Schroder GAIA Egerton Equity Second Quarter 2017 6

Important Information:
This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder GAIA (the
Company). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.
Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and
prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copied o
which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A.
An investment in the Company entails risks, which are fully described in the prospectus.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and
investors may not get the amount originally invested.
Egerton has expressed its own views and opinions in this document and these may change.
This document is issued by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated
by the Financial Conduct Authority. For your security, communication may be taped or monitored.
The fund is currently closed for new subscriptions; however, to the extent that capacity becomes available new
subscriptions will be considered. To the extent you wish to subscribe in the fund, when there is available capacity, please
contact Schroder Investment Management (Luxembourg) S.A. who can explain the process and your name can be added to
a waiting list which will be considered on a first come first served basis.
Risk Considerations: The capital is not guaranteed. 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. The title of securities may be jeopardised
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. The fund may hold indirect short exposure in anticipation of a decline of prices of
these exposures or increase of interest rate where relevant. The fund may be leveraged, which may increase the volatility of the
fund. The fund may not hedge all of its market risk in a down cycle. Investments into foreign currencies entail exchange risks.
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. 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.
Third Party Data Disclaimer: 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.com contains additional disclaimers which apply to the third party data.

Schroder GAIA Egerton Equity Second Quarter 2017 7