August 20, 2004 Schroders: Trimming Equities; Moving Into Cash The fund house gives an update on its global asset allocation for August 2004. by Schroder Investment Management

Schroders Asset Allocation AUGUST 2004 OVERVIEW We continue to reduce risk by trimming our overweight in equities and adding the proceeds to cash. The improvement in global economic activity is peaking, interest rates are rising and we expect US profits growth to slow later this year. Recent economic news from the US has been weaker than expected, primarily due to the impact of higher oil prices. Despite signs of weaker growth, inflation is building, and we still expect the Federal Reserve to raise interest rates toward a 'neutral' level. Other economies have been less affected by the oil price, but we expect it to act as a toll on growth in Asia, which is a major oil importer. This region is also contending with the slowdown of growth in China. We are therefore further reducing the cyclical stance of our global portfolios by moderating the overweight in emerging markets. However, recognising the recent weakness in equity markets and increase in negative sentiment, we are moving by less than last month and we remain modestly overweight equities. Equities still look better value than bonds and, on a short-term view, there is a reasonable chance that growth picks up in the current quarter. For example, weak US payroll figures reported in July probably understate the strength of the US labour market. EQUITY MARKETS US Higher oil prices have taken their toll on US economic activity in the second quarter, with consumer spending growth falling to just 1% at an annualised rate. This has been called a 'soft patch' by Fed Chairman Alan Greenspan, and it is widely expected that the economy will re-accelerate again in the current quarter. Weak payroll data in July has led to doubts about the sustainability of growth, but overall we believe that this short-term data probably belies the underlying strength of the labour market. With inflationary pressures building, we expect the Fed to continue to raise interest rates (from the current level of 1.5% to 2% by the end of this year, and 4% by the end of 2005). We also expect profits growth to slow to around 3% year-on-year in 2005. With the profit share of GDP at an elevated level, the scope for corporate earnings to outpace national income is increasingly limited. We are also cautious on the US dollar and remain underweight. UK We remain modestly overweight UK, a defensive market which offers fair value. The UK economy has been one of the least affected by the rise in oil prices, with UK GDP rising at 0.9% quarter-on-quarter in the second quarter. Interest rates are rising, with the recent 25bps hike widely anticipated by the market, but should remain at modest levels by historic standards. We believe UK firms will increase productivity in coming quarters, and we expect profits growth to be well ahead of the US in 2005. Europe ex UK In Europe ex UK equity valuations are reasonable. These economies have also stood up well as oil prices have risen. Although not completely immune, Europe is less affected by the impact of higher crude oil prices due to the high tax component on petrol and greater energy efficiency. Business surveys indicate that confidence is improving, with readings for Germany, France, Italy and Belgium all improving in July. We are also confident that there should be an improvement in corporate news ahead. Earnings momentum is now positive and high levels of cashflow could lead to an increase in corporate activity. Japan Japan remains our strongest positive conviction. Macroeconomic news was not as strong in July as it has been in previous months and the market has also been impacted by global weakness in technology stocks (as well as predictions of a poor result for the ruling LDP party in Upper House elections - although in the event the LDP only lost two seats). Our reason for favouring this market continues to lie at the corporate level. Cost-cutting and restructuring is leading to strong profits growth among Japan's largest companies, and as investors consider this in the context of rising global interest rates, we expect the rotation back to quality to gather pace. Asia ex Japan We remain modestly underweight Asia ex Japan. High oil prices, rising US interest rates and slowing growth in China will all act as brakes on growth in the region next year. We are becoming increasingly defensive at the stock level, avoiding China plays. Emerging Markets We have reduced our overweight in emerging markets for the third successive month. These markets offer reasonable value, but there is no longer a compelling reason to retain a strong overweight from a valuation standpoint alone. Furthermore, emerging markets tend to underperform at this stage of the cycle and could be vulnerable to continuing global investor nervousness. BOND MARKETS Government Bonds We remain underweight bonds: we believe that bond markets have over-extrapolated the recent 'soft patch' in the economy, and have not fully factored in the extent of interest rate rises in the year ahead. As a result, five year Treasury yields, which are below 3.5%, are expensive. We remain underweight government bonds. We have reduced sensitivity to interest rate risk in our bond portfolios and we are short duration. We are positioned for yield curve flattening as, in a rising interest rate environment, the front end of the curve underperforms long-dated securities. Corporate Bonds We are neutral corporate bonds, which are trading at the top end of their range. We also believe there is a risk that weak equity markets will create shareholder demand for companies to return capital via dividends and share buybacks, which would be negative for corporate bonds. We continue to invest only in names in which our credit analysts have strong conviction, and where strong cashflow and balance sheets should mitigate this risk. High Yields/EMD We are neutral high risk bonds (high yield corporates and emerging markets debt). We expect speculative excess in global credit markets to unwind and these bonds will also come under pressure as markets start to price in the true extent of interest rate rises. Inflation-linked Bonds We remain neutral global inflation-linked bonds. However, we maintain an overweight exposure to long inflation-linked bonds both in the US and the Eurozone. The information and opinions contained in this document have been obtained from sources Schroders considers to be reliable however these have not been checked or verified by Schroders. 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