MyFolio Due Diligence Report Quarter 2 2016

July 2016 This document is for investment professionals only and should not be distributed to or relied upon by retail clients. It is only intended for use in jurisdictions where the relevant investment vehicles are authorised for distribution or where no such authorisation is required.

About Standard Life Investments

Standard Life Investments is a leading asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. As active managers, we place significant emphasis on rigorous research and a strong collaborative ethos. We constantly think ahead and strive to anticipate change before it happens, ensuring that our clients can look to the future with confidence. As at 31 December 2015, Standard Life Investments managed £253.2 billion on behalf of clients worldwide. Our investment capabilities span equities, fixed income, real estate, private equity, multi-asset solutions, fund-of-funds and absolute return strategies. Headquartered in Edinburgh, Standard Life Investments employs more than 1,100 talented individuals. We maintain offices in a number of locations around the world including Boston, Hong Kong, Paris, London, Beijing, Sydney, Dublin and Seoul. In addition, we have close relationships with leading domestic players in Asia, including HDFC Asset Management in India and Sumitomo Mitsui Trust Bank in Japan. Our parent, Standard Life plc, was established in 1825. A leading provider of long-term savings and investments, Standard Life floated on the London Stock Exchange in 2006 and is now a FTSE 100-listed company. Standard Life

Investments launched as a separate company in 1998 and has quickly established a reputation for innovation in pursuit of our clients’ investment objectives. Our investors rank among some of the world’s most sophisticated and high-profile institutions. They include pension plans, banks, mutual funds, insurance companies, fund-offund managers, endowments, foundations, charities, official institutions, sovereign wealth funds and government authorities. A breakdown of assets under management has been provided below: Asset Class

£m

Equities

83,715.7

Fixed Interest

85,180.2

Real Estate

16,259.9

Cash

52,636.4

Other

15,416.2

TOTAL

253,208.3

Source: Standard Life Investments, as at 31 December 2015

Contents 2 Standard Life Investments

9 Tactical Asset Allocation Update

3 MyFolio Investment Process

10 Risk Management and Control Update

6 Performance Summary 7 Market Review and Outlook 8 Strategic Asset Allocation Update

2

MyFolio Due Diligence Report

11 Fund Manager Meetings 12 Fund Changes

MyFolio Investment Process

The MyFolio funds are managed by Bambos Hambi, Head of Fund of Funds at Standard Life Investments. Bambos is supported in the management of the MyFolio funds by a number of our key investment professionals, in the Strategic and Tactical Asset Allocation, Fund Selection and Governance functions.

Strategic Asset Allocation The Strategic Asset Allocation (SAA) for the funds is determined by Standard Life Investments in consultation with Moody’s Analytics, a world leader in financial risk modelling. The SAA is formally reviewed on a quarterly basis on completion of the Moody’s Analytics analysis. Moody’s Analytics undertake a risk/return optimisation process using the appropriate strategic asset classes as agreed with Standard Life Investments and make recommendations to Standard Life Investments as to the optimum strategic mix of those assets. The mix of assets is constrained to ensure a suitably diversified portfolio is achieved. The constrained optimisation process uses a 10 year time horizon to construct the strategic asset allocation benchmarks with the aim of generating optimal returns for each level of risk over the period. The resulting asset allocations are used to populate the asset mix “pots” for the MyFolio Market Funds.

SAA for MyFolio Managed and MultiManager Funds For the two suites of active MyFolio Funds there is an additional step. Standard Life Investments believe that absolute return strategies offer a further valuable source of diversification for multi-asset portfolios. As such, we have included our Global Absolute Return Strategies Fund (GARS) as a strategic holding in the

growth assets of the MyFolio Managed, MyFolio Managed Income, MyFolio Multi-Manager and MyFolio Multi-Manager Income Funds. In addition we have also included Absolute Return Bond Funds as strategic holdings in the defensive assets of the same funds. It should be noted that due to the asset management strategies adopted in absolute return funds traditional “long only” modelling techniques are less relevant for strategic asset allocation purposes.

Tactical Asset Allocation Tactical Asset Allocation (TAA) positions for each fund will be decided by the Multi-Asset Investing (MAI) Team within Standard Life Investments. The MAI Team will apply their tactical investment views to fine tune the strategic asset allocation and take advantage of shorter term opportunities. In practice this will tilt the strategic asset allocation benchmarks in the direction of favoured asset classes over the shorter term. The TAA positions implemented across the multi-asset portfolios are reviewed on a regular basis with any changes being driven by a change in recommendation from the Global Investment Group (GIG), the team that collates our House View or by a change in the benchmark weighting in a specific asset class. The nature of the five risk based funds requires disciplined strategic risk controls consistently applied across the suite of funds , therefore the maximum TAA positions permissible within each asset class is + /- 5%. An additional risk control is also applied at defensive and growth assets level. This higher level constraint is at the same level of +/- 5%.

MyFolio Due Diligence Report

3

MyFolio Market Funds Fund selection for the Market Funds is largely centred on finding suitable tracker funds to replicate the performance of the strategic asset class benchmarks. The key selection criterion is confidence in the underlying Fund Managers to deliver a low tracking error fund at a competitive price.

Once we invest in a fund, it is continuously monitored in order to identify any changes that could impact future returns. We recognise the importance of having a strong sell discipline and therefore consider our monitoring process as important as the initial selection. Monitoring our risk exposures also allows us to highlight any unintended risks that may emerge in our portfolios, so that we can remove them before they begin to impact returns.

The selection of the active real estate and active high yield bond funds follows the same process as for other active external managers with the aim of creating a well-diversified basket of assets that can act as a proxy for their respective markets.

The Fund Manager has ultimate responsibility for ensuring that any fund selected is an appropriate selection for the asset class the fund has been chosen to represent.

Fund Selection

MyFolio Managed Funds The funds selected for the Managed Funds are primarily selected from the range of Standard Life Investments retail Mutual Funds. Standard Life Investments offers a wide range of quality funds across the majority of the asset classes. Where Standard Life Investments do not offer a suitable fund the Fund Manager will seek to invest in funds from the rest of the market. MyFolio Multi-Manager Funds We apply a consistent a tried and tested manager selection process to capitalise on opportunities we identify. By undertaking a combination of both quantitative and qualitative due diligence we aim to filter a large universe of funds into a select group of funds which represent ‘best of breed’ solutions.

Portfolio Construction From a rigorously researched position, we construct efficient, well-diversified, active portfolios with a risk/reward profile appropriate to the fund’s stated mandate. In doing so, we will seek to generate superior risk-adjusted returns in a consistent manner throughout the economic cycle.

4

MyFolio Due Diligence Report

Fund Rebalancing Standard Life Investments aim to always keep trading costs to a minimum whilst ensuring funds remain within their agreed risk parameters. Fund holdings are reviewed daily to determine what, if any, re-balancing is required as a result of market movements and cash flow. Daily re-balancing back to an exact pre-determined TAA position without any tolerance levels would, we believe, be counter productive from a cost perspective. As such we consider three key areas on a daily basis, asset allocation tolerance, portfolio tracking error and deal size to determine our dealing strategy for the fund. Asset allocation tolerance - we aim to keep the daily positions of each asset class within +/1.25% of the TAA position Portfolio Tracking Error - we aim to have a low daily tracking error relative to the default portfolio position

Deal size - deal sizes are considered to ensure dealing costs are not disproportionately high relative to the cash allocation Before any deals are struck we go through an iterative process that determines the most cost effective dealing strategy taking into account the above factors. We believe we add value through this process by keeping dealing costs low whilst ensuring the funds remain within their defined risk parameters.

Risk Management & Control Portfolio Risk Management There is an extensive risk management infrastructure to ensure that the Fund Solution and Multi-Asset Investment Team operate within the investment framework. Risk is monitored and controlled by a combination of organisational structures and processes. There are three distinct groups engaged in the risk management process for MyFolio: Fund Solution Team – undertakes risk analysis at portfolio level. On top of backward looking risk measures such as information ratios, monthly underlying holdings are received from fund groups to understand forward looking risk indicators. For all funds we own (and before purchase of a new fund), we insist on monthly portfolio holdings data by the 15th day of every month. For all investment groups that we deal with, we have arranged Non-Disclosure

Agreements which are signed-off by both parties’ legal teams to ensure confidentiality. Investment Risk Team – our Investment Risk Team works independently and are responsible for monitoring the performance and risk characteristics of all of the portfolios managed at Standard Life Investments. We utilise Industry standard systems – such as RiskMetrics, SunGard APT and UBS Delta to measure and monitor risk. Investment Governance Team – working independently this team is responsible for ensuring the consistency and integrity of the operation of the investment process versus specification / mandate. Company Risk Management Standard Life Investments’ Investment Restrictions Control Teams’ sole responsibility is to monitor positions within funds on a daily basis, and ensure compliance with regulatory and client-driven investment restrictions and guidelines. This team is managed independently from our asset management teams and reports to the Director of Investment Governance.

MyFolio Due Diligence Report

5

Performance Summary

Performance Growth Funds

3 mths 12 mth Total Total Return % Return %

3 yrs PA %

5 yrs PA %

Launch* Total Return %

Launch* PA %

Volatility 3 yrs Std Dev %

Market I

2.5

4.5

4.8

5.5

31.0

4.8

3.4

Market II

2.7

4.7

5.7

6.5

40.7

6.1

4.8

Market III

2.9

4.6

6.5

6.8

46.0

6.8

6.4

Market IV

3.3

4.7

7.2

7.1

49.7

7.3

8.0

Market V

4.0

5.4

7.8

7.5

54.9

7.9

9.5

Managed I

1.4

2.6

4.1

4.8

29.5

4.6

2.9

Managed II

1.1

2.1

5.2

5.8

38.3

5.8

4.1

Managed III

0.3

1.0

5.9

6.6

47.0

6.9

5.3

Managed IV

0.1

0.5

6.7

7.1

50.3

7.3

6.6

Managed V

0.3

0.8

7.4

7.8

56.7

8.1

7.7

Multi-Manager I

1.7

2.3

4.0

4.7

25.7

4.1

2.9

Multi-Manager II

1.5

2.0

4.9

5.8

35.3

5.4

4.1

Multi-Manager III

1.4

1.6

5.7

6.6

41.7

6.2

5.3

Multi-Manager IV

1.4

1.3

6.6

7.2

48.5

7.1

6.5

Multi-Manager V

1.7

1.5

7.1

7.6

51.9

7.5

7.6

Performance Income Funds

3 mths Total Return %

12 mth Total Return %

3 yrs PA %

Managed Income I

1.7

3.0

3.8

20.8

4.3

2.7

Managed Income II

0.5

1.5

4.6

29.6

5.9

4.0

Managed Income III

0.3

1.0

5.1

35.6

7.0

4.9

Managed Income IV

-0.1

0.5

5.7

40.1

7.8

5.7

Managed Income V

0.5

1.5

6.0

43.7

8.4

6.8

Multi-Manager Income I

1.9

3.2

3.1

16.9

3.5

2.8

Multi-Manager Income II

1.3

2.1

3.9

26.8

5.4

4.1

Multi-Manager Income III

1.5

2.3

4.4

36.0

7.1

5.2

Multi-Manager Income IV

1.5

1.8

4.5

36.2

7.1

6.2

Multi-Manager Income V

1.7

2.2

5.4

39.0

7.6

7.2

Launch** Launch** Total PA % Return %

Volatility 3 yrs Std Dev %

* Launch: 01 October 2010 ** Launch: 06 January 2012 Sources: Standard Life Investments, Morningstar, 30 June 2016, institutional growth and income share class performance shown in the respective tables. Standard deviation based on 36 monthly data points

6

MyFolio Due Diligence Report

Market Review and Outlook

Market review

Outlook

Concerns about the global economy, the direction of US monetary policy and the UK’s EU referendum debate were the main talking points this quarter. Equity markets were volatile for much of the review period. Economic data from the US and China remained mixed, although the Eurozone continued on the road to recovery thanks partly to ongoing accommodative monetary policy from the European Central Bank. Perhaps the biggest event was the UK’s vote on 23 June to leave the EU. Markets across the world sold-off in response, although many have since regained their poise.

The UK’s EU referendum result presents a significant risk to global equities in the context of already weak profits growth and expensive share prices. As we have seen, UK & European share prices will be the most affected. Corporate profits will also come under pressure. In response, we would expect to see a noticeable easing of monetary (by the central banks), and eventually fiscal policy (from governments) in most of the world economies. Overall, markets are likely to remain volatile in the short term; however, we believe this has the potential to create stock-specific buying opportunities as valuations become more attractive.

Turning to corporate bonds, stabilising commodity prices boosted risk appetite at the start of the quarter. In the UK and Europe, investors were comforted by the ECB’s planned purchase of corporate bonds. In June, investors met the UK’s EU referendum result with surprise and credit spreads (the difference in yield between government bonds and corporate bonds) widened, while sterling fell against the US dollar. However, by the end of the period, credit spreads had mostly recovered, as investors adopted a ‘wait-and-see’ approach to the market uncertainties. UK commercial real estate endured a difficult second quarter, with slowing capital values and rental growth resulting in moderating total returns. Investment decisions were also put on hold ahead of the EU referendum, putting further downward pressure on capital values. The investment hiatus reportedly had most impact on Central London. Following the referendum, investors delayed a significant amount of transactions or cancelled them due to heightened uncertainty.

For corporate bonds, the effects of the EU referendum will filter into growth, politics and asset prices both inside and outside the UK. We expect a reaction from central banks, with more easing from the Bank of England and the European Central Bank (ECB) probable. The Federal Reserve is also likely to postpone further rate hikes. However, the ECB’s Corporate Sector Purchase Programme surprised to the upside and could be accelerated, creating a very strong technical tailwind for the bonds that are eligible. Therefore, strong technical factors and fair-to-slightly cheap valuations are balanced out by political risk and a lower growth profile. Given heightened caution, we expect increased downward pressure on UK commercial real estate capital values. Moderating business and consumer confidence following the EU referendum result compounds this. The magnitude of the declines will depend on the result’s impact on the domestic economy. In the short term, there are likely to be more sellers than buyers in the market. This will further affect capital values until there is clarity on political leadership and real estate’s medium-term prospects. In due course, we will fully update our House View to reflect the current market outlook.

MyFolio Due Diligence Report

7

Strategic Asset Allocation Update

The Strategic Asset Allocation Committee Bill Lambert (Chair)

Bill is responsible for ensuring that agreed investment processes are applied by the investment teams and that investment actively is consistent with both regulatory requirements and investment guidelines.

Stephen Acheson Executive Director, Global Strategic Partnerships

Stephen has overall responsibility for the provision of investment management services and support to the wider global Standard Life group, covering both Retail and Institutional operations.

James Esland Investment Manager

James is responsible for the Investment Management processes for Global Absolute Returns and Liability Driven Investment products. He also makes the Tactical Asset Allocation decisions for MyFolio.

Bambos Hambi Head of Fund of Funds Management

Bambos has overall responsibility for the portfolio management of the 25 MyFolio funds. Bambos also heads up the 10 strong Fund Solutions team.

Iain McLeod Investment Director

Iain is responsible for the development, technical support and promotion of the full range of Standard Life Investments’ retail multi funds.

Eddie Middleton Head of Risk

Eddie is responsible for two functions within Investment Governance: quantitative risk processes and investment processes.

James Millard Investment Director

James assists Bambos in the leadership of the Fund Solutions team that is responsible for the MyFolio suite of funds; he leads the team’s commercial relationships with external fund groups.

We review the Strategic Asset Allocation (SAA) for each of the MyFolio funds every quarter, with the aim of ensuring that we continue to meet the best long-term interests of investors. Following the most recent review, we made no changes to the SAA model.

8

MyFolio Due Diligence Report

Tactical Asset Allocation Update

During the quarter, we made the following Tactical Asset Allocation changes. ¬ Moved to a neutral position in Japanese equities – while the Bank of Japan continued to support reflation, we are losing faith in the effectiveness of monetary policy and in officials’ ability to provide sufficient fiscal stimulus. A deflationary mind-set persists, dissuading companies from investing or increasing wages. ¬ Increased our overweight position in emerging market (EM) local currency debt – EM local currency debt offers a yield that is 3% higher than emerging market equities. This makes it particularly attractive, especially in a world where interest rates could remain lower for longer. While EM local currency debt has rallied over recent months, we believe an increased position, even at current levels, will further improve portfolio diversification. ¬ Increased our underweight position in US equities – the US looked progressively expensive, as the S&P 500 Index approached its all-time high. Meanwhile, corporate earnings remained under pressure from rising costs as wage growth started to feed through. In addition, we have listed below some of the main TAA positions held during the second quarter. ¬ Underweight position in UK equities – the EU referendum was the dominant threat to UK equities throughout the quarter. The gulf in returns between large-cap companies and small-caps grew as uncertainty increased and the global exposure of large-caps partially insulated them from the shock of the referendum result.

¬ Overweight position in European equities – ongoing actions from the European Central Bank continue to support Eurozone growth. Equity valuations also remained relatively attractive, given the backdrop of improving economic data. ¬ Overweight position in UK commercial real estate – we have maintained an overweight position for some time, as a relatively steady UK economy supported returns. UK commercial real estate also tends to offer an appealingly low correlation to equity markets. Following the EU referendum, we reviewed our TAA positions as we looked to reduce risk in the portfolio. With this in mind, we made the following changes on 1 July. ¬ Introduced an exposure to UK gilts ¬ Removed our underweight position in shortdated global index-linked bonds ¬ Removed our overweight position in European equities ¬ Increased our underweight position in UK equities ¬ Changed our US equities position from underweight to overweight ¬ Reduced our UK direct commercial real estate exposure to neutral We will provide full details on these changes in next quarter’s due diligence report.

MyFolio Due Diligence Report

9

Risk Management and Control Update

Portfolio Risk Management Governance Fund Solutions Team

Nothing to Report

Investment Risk

Nothing to Report

Investment Governance

Nothing to Report

Company Risk Management Investment Restrictions Control

10 MyFolio Due Diligence Report

Nothing to Report

Fund Manager Meetings

During the quarter, the Fund Solutions Team met with the following asset managers.



Fund Manager Meetings AMP Capital

Lazard

Artemis

Legg Mason

AXA Investment Managers

LionTrust

Barings

Loomis Sayles

BlackRock

M&G

BNY Mellon

Majedie

Boston Partners

Metropole

Brandes Investment Funds

Mirabaud

Brandywine Global

Mirae Asia

Brookfield Asset Management

Morgan Stanley

Capital Group

Muzinich & Co

Charlegmagne

Nikko Asset Management

Columbia Threadneedle

Nordea Investment Management

Comgest

Oaktree Capital Management

Delaware Investments

Old Mutual Global Investors

DNCA Investments

Payden & Rygel Asset Management

Edmond de Rothschild

Pictet Japan Equity Opportunities

EI Sturdza Investment Funds

PIMCO

Fidelity

Putnam

Four Seasons Asia Investments

River & Mercantile

Franklin

Robeco Asset Management

GSAM

RWC Partners

Henderson Global Investors

Smith & Williamson

Hermes Investment Management

Schroder

Invesco Perpetual

Standard Life Investments

JO Hambro

T. Rowe Price

JPMorgan

Third Ave Management

Kleinwort Benson

Wellington Management

MyFolio Due Diligence Report

11

Fund Changes

MyFolio Market

Q2 2016

Period Fund

Risk Levels Change Rationale

Blackrock Japanese Equity Tracker

I-V

Reduced in line with TAA changes

Legal & General Emerging Markets Gov Bond (LC) Index

I-V

Increased in line with TAA changes

SLI UK Real Estate

I-V

Bought due to the merger of the SLI Ignis UK Property and the SLI UK Property Fund.

MyFolio Managed

Q2 2016

Period Fund

Risk Levels Change Rationale

SL North American Trust

I-II

Reduced to purchase SLI American Equity Income

SLI American Equity Income

I-II

Purchased to reduce exposure to SL North American Trust

SLI Emerging Markets Debt (LC)

I-V

Increased in line with TAA changes

SLI Japanese Equities

I-V

Reduced in line with TAA changes

SLI Japanese Equity Growth

I-V

Reduced in line with TAA changes

SLI UK Real Estate

I-V

Bought due to the merger of the SLI Ignis UK Property and the SLI UK Property Fund.

MyFolio Multi Manager

Q2 2016

Period Fund

12 MyFolio Due Diligence Report

Risk Levels Change Rationale

Artemis US Select

I-V

Reduced in favour of Old Mutual North American Equity

Blackrock US Equity Tracker

II-V

Reduced in favour of Old Mutual North American Equity

CF Morant Wright Nippon Yield

I-V

Reduced in line with TAA changes

Fulcrum Diversified Core Absolute Return

I-V

Purchased to complement the existing SLI GARS holding

Neuberger Berman Emerging Market Debt (LC)

I-V

Increased in line with TAA changes

Old Mutual North American Equity

I-V

Purchased to reduce exposure to Artemis US Select and Blackrock US Equity Tracker

Schroder Tokyo

I-V

Reduced in line with TAA changes

SLI GARS

I-V

Reduced to introduce Fulcrum Diversified Core Absolute Return

Fund Changes

MyFolio Managed Income

Q2 2016

Period Fund

Risk Levels Change Rationale

CF Morant Wright Nippon Yield

I-V

Reduced in line with TAA changes

Columbia Threadneedle US Equity Income

I-V

Sold to purchase SLI American Equity Income

JPM US Equity Income

II-V

Sold to purchase SLI American Equity Income

SLI American Equity Income

I-V

Purchased to replace JPM and Columbia Threadneedle US Equity Income

SLI Emerging Markets Debt (LC)

I-V

Increased in line with TAA changes

SLI UK Real Estate

I-V

Bought due to the merger of the SLI Ignis UK Property and the SLI UK Property Fund.

MyFolio Multi Manager Income

Q2 2016

Period Fund

Risk Levels Change Rationale

CF Morant Wright Nippon Yield

I-V

Reduced in line with TAA changes

Fulcrum Diversified Core Absolute Return

I-V

Purchased to complement the existing SLI GARS holding

Neuberger Berman Emerging Market Debt (LC)

I-V

Increased in line with TAA changes

SLI GARS

I-V

Reduced to introduce Fulcrum Diversified Core Absolute Return

MyFolio Due Diligence Report

13

Notes

14 MyFolio Due Diligence Report

If you would like to find out more about our strategies, please visit www.standardlifeinvestments.com where you will find contact details for your location.

Visit us online

standardlifeinvestments.com This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. It does not constitute an offer, or solicitation of an offer, to sell or buy any securities or an endorsement with respect to any investment vehicle. The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions.

MyFolio Due Diligence Report

15

Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training. www.standardlifeinvestments.com © 2016 Standard Life, images reproduced under licence INVBGEN_15_1515_MyFolio_Due_Diligence_Report_TCM

0716