February 2016
Schroders
Portfolio Solutions Monthly
February 2016
Markets dashboard
Yield changes (bps): Jan 16 to Feb 16
Risk asset m arket changes
10 year
20 year
50 year
Jan 16 to Feb 16
FI Gilt yield

-22

-9

-6
MSCI World

-1.0%
IL Gilt yield

-5

+1

+2
FTSE 100

+0.2%
RPI sw ap

-12

-9

-7
5yr Euro CDS

+8 bps
FI Gilt/Sw ap spread

+12

+22

+25
1 year 90% FTSE 100 put

+0.2%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 29 February 2016. Change in equity put is the outright change in premium.
Funding level dashboard
1 year reference funding level progression
1 month attribution of funding level change
105%
88%
100%
95%
87%
90%
85%
80%
Feb 15
86%
May 15
Aug 15
Nov 15
Feb 16
Jan funding Nominal
level:
rates:
88%
-0.7%
Real rates:
+0.2%
Growth
assets:
-0.4%
Feb funding
level:
87%
Source: Schroders, Bloomberg, 29 February 2016. Please refer to the supporting notes for further details.
Riding out the storm… how can pension schemes manage equity
risks?
Comparison of risk-managed equity strategies and
underlying index over February 2016
100%
Global equity markets suffered a rollercoaster ride over February. The
MSCI World Total Return index fell over 6% (in USD) before recovering to
end the month down just 1%. Periods such as this highlight the riskiness of
equities, but also the benefits that risk management strategies can deliver.
One such strategy is volatility targeting. This strategy targets a predetermined level of risk by varying exposure to the underlying equity
market as volatility rises and falls. The chart shows that this strategy (light
blue line) was able to provide a smoother investment path than a direct
investment in MSCI (dark blue line) during the recent period of market
stress. The Schroders Volatility Controlled Global Equities (VCGE) fund
extends this strategy by incorporating a rolling option-based overlay
providing hard protection against instantaneous loss (yellow line).
98%
96%
94%
92%
01-Feb
MSCI World
MSCI Volatility Target 10%
Volatility Target + Rolling Put
08-Feb
15-Feb
22-Feb
29-Feb
Source: Schroders, Bloomberg
Both strategies achieved a similar overall outcome to equities, but without the sharp decline and recovery of a “naïve” equity
exposure. They do this by employing a systematic approach to managing uncertainty, a smarter way to take exposure whilst
still based on a standard equity index.
Contact us
Please contact us at PortfolioSolutions@schroders.com if you would like further information on how
Schroders can help manage your Scheme’s exposure to risk.
Schroders: Portfolio Solutions Monthly
Market data: LDI markets
One
year
range
• L H•
Month
end
29 Feb
2016
One
Month
31 Jan
2016
Three
Months
30 Nov
2015
One
Year
28 Feb
2015
5 Year
0.74%
1.03%
1.29%
1.31%
10 Year
1.44%
1.66%
1.90%
1.86%
20 Year
2.33%
2.42%
2.65%
2.52%
30 Year
2.45%
2.47%
2.65%
2.65%
50 Year
2.16%
2.22%
2.42%
2.54%
1 Month change (RHS, Bps):
Month end curve (LHS):
Nom inal rates – Gilt m arkets
4.0%
40
2.0%
0
0.0%
-40
0
10
20
30
40
50
Real rates – Index-linked gilt m arkets
5 Year
-1.27%
-1.22%
-1.15%
-1.07%
10 Year
-0.96%
-0.90%
-0.85%
-0.80%
20 Year
-0.86%
-0.87%
-0.78%
-0.69%
30 Year
-0.83%
-0.87%
-0.78%
-0.68%
50 Year
-0.97%
-0.99%
-0.94%
-0.70%
5 Year
2.46%
2.63%
2.84%
2.69%
10 Year
2.80%
2.91%
3.10%
2.93%
20 Year
3.21%
3.30%
3.40%
3.28%
30 Year
3.27%
3.35%
3.43%
3.35%
50 Year
3.27%
3.34%
3.42%
3.34%
5 Year
-0.11%
-0.14%
-0.12%
-0.23%
10 Year
0.15%
0.03%
0.03%
-0.05%
20 Year
0.76%
0.55%
0.55%
0.32%
30 Year
0.91%
0.63%
0.61%
0.41%
50 Year
0.78%
0.53%
0.54%
0.36%
2.0%
20
0.0%
0
-2.0%
-20
0
10
20
30
40
50
Inflation rates – RPI sw ap m arket
4.0%
20
2.0%
0
0.0%
-20
0
10
20
30
40
50
Nom inal gilt curve vs sw ap curve
Global bond m arkets
1.0%
30
0.0%
0
-1.0%
-30
0
10
20
30
40
50
Forw ard gilt curves
10 Year Bund
0.11%
0.33%
0.47%
0.33%
10 Yr Gilt/Bund Spread
1.23%
1.23%
1.35%
1.46%
10 Year US Treasury
1.73%
1.92%
2.21%
1.99%
10 Yr Gilt/US Spread
-0.39%
-0.35%
-0.37%
-0.19%
5 year IG CDS – Euro
100
93
70
50
5 year IG CDS – US
108
102
84
61
3.0%
2.0%
1.0%
0.0%
Money m arkets
0
10
Gilt curve
3 yrs fwd
Currency rates
20
30
40
1 yr fwd
5 yrs fwd
50
29 Feb
2016
31 Jan
2016
30 Nov
2015
28 Feb
2015
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP/USD
1.39
1.42
1.51
1.54
SONIA
0.46%
0.46%
0.46%
0.45%
GBP/EUR
1.28
1.31
1.43
1.38
3m Libor
0.59%
0.59%
0.57%
0.56%
GBP/JPY
156.8
172.6
185.3
184.7
Interest rate sw aptions as at m onth end:
1y20y
3y20y
5y20y
3y30y
5y30y
ATM* Forw ard
Par sw ap rate
1.58%
1.67%
1.73%
1.58%
1.61%
ATM* Implied volatility
0.76%
0.78%
0.75%
0.74%
0.72%
Source: Schroders, Bloomberg, 29 February 2016. *At the money. All data as at month end allowing for UK trading days.
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Schroders: Portfolio Solutions Monthly
Market data: Risk management strategies
One
year
range
• L H•
Month
end
One
Month
Three
Months
One
Year
29 Feb
2016
31 Jan
2016
30 Nov
2015
28 Feb
2015
MSCI World
1,547
1,562
1,694
1,773
FTSE 100
6,097
6,084
6,356
6,947
S&P 500
1,932
1,940
2,080
2,105
Euro Stoxx 50
2,946
3,045
3,506
3,599
Nikkei 225
16,027
17,518
19,747
18,798
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Feb 15
May 15
Aug 15
Nov 15
Feb 16
Nov 15
Feb 16
Equity option m arket indicators (FTSE 100, 1 year)
ATM* Implied volatility
20.9%
19.6%
16.8%
14.2%
Skew (90 – 110)
5.7%
5.4%
5.4%
5.0%
ATM im plied 1 year volatility
Skew (90 vol – 110 vol)
25.0%
6.0%
20.0%
5.0%
15.0%
10.0%
Feb 15
May 15
Aug 15
Nov 15
Feb 16
4.0%
Feb 15
May 15
Aug 15
Equity risk m anagem ent strategy indicators (FTSE 100 total return, spot prices)
90% Put
Zero cost collar call strike
(90% Put)
Zero cost put spread
collar call strike
(70%/90%)
1 yr
4.4%
106.9%
110.4%
3 yr
8.3%
110.2%
124.1%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread
collar call strike
(70%/95%)
1 yr
5.7%
104.2%
107.2%
3 yr
11.1%
108.8%
119.4%
NB - one year range indicators for equity risk management strategies are based on month end values.
Note: one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 29 February 2016. *At the money. All data as at month end
allowing for UK trading days.
About us
The Schroders Portfolio Solutions Team partners with investors to provide risk management strategies across all major
financial markets.
The team structures and executes physical and derivative based strategies to manage the exposure to global equity
and fixed income markets. These solutions draw on the full opportunity set of exchange traded and Over-The-Counter
derivatives.
To help manage interest and inflation rate risk, Schroders Portfolio Solutions offers a comprehensive and fully flexible
solution utilising segregated solutions (encompassing physical bonds, swaps, swaption and synthetic gilt based
strategies), as well as the Schroder Matching Plus pooled fund solution. We also provide funding level and marke t
based trigger monitoring and execution for both pooled and segregated solutions.
Clients can access these solutions under directed or discretionary mandates.
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Schroders: Portfolio Solutions Monthly
Notes
The funding level dashboard shows the funding level progression and attribution of funding level change of a Reference
Pension Scheme. This Reference Pension Scheme has a liability duration of around 20 years and assumes the liability is
linked 50% to real interest rates and 50% to nominal rates. The assets are assumed to have a beta of 0.75 to global equity
markets. This enables the reader to observe the scale of component changes. No allowance for the impact of the
progression of time on liabilities is included in the funding level dashboard. Funding level progression is presented on a
rolling 12 month basis, indexed to an initial funding level of 100%.
Important Information:
For professional investors only.
The views and opinions contained herein are those of the Portfolio Solutions Team at Schroders, and do not necessarily repres ent views expressed or
reflected in other Schroders communications, strategies or funds. This newsletter is intended to be for information purposes only and it is not intended as
promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is
not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information he rein is believed to be
reliable but Schroder Investment Management Limited (SIM) does not warrant its completeness or accuracy. Reliance should not be placed on the views and
information in the document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not
be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
The forecasts stated in the newsletter are the result of statistical modelling, based on a number of assumptions. Forecasts a re subject to a high level of
uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information
purposes as at today's date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as
economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumpt ions, economic and
market conditions, models or other matters change. Volatility Control Global Equity Fund: The Fund may make intensive use of derivative financial
instruments some of which may be over the counter and hence involve counterparty risk. The Fund may be leveraged which means that fewer assets are
needed to hedge future liabilities, however this also means that the return on the Fund is more volatile. Where applicable, a minimum Fund liquidity threshold
aims to allow the Fund to meet its derivative obligations (i.e. collateral calls) however there is a risk that severe market movements may lead to the level of
liquidity in the Fund being insufficient to meet these obligations. Management of the Fund within this threshold aims to ensu re that the liquidity in the Fund is
sufficient to continually meet these obligations. In the event that this is not possible, there is a risk that the Fund will be closed. The Fund may use a sampling
approach to obtain exposures which means that liability driven investment exposures may approximate to, rather than exactly m atch, the target profile. All
investors are UK institutional investors that are advised by Aon Hewitt Delegated Consulting Service. For the purposes of the Data Pr otection Act 1998, the
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security, communications may be taped or monitored. Issued in March 2016 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V
7QA. Registration No. 1893220 England. Authorised and regulatedy the Financial Conduct Authority
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