January 2016
Schroders
Portfolio Solutions Monthly
January 2016
Markets dashboard
Yield changes (bps): Dec 15 to Jan 16
Risk asset m arket changes
10 year
20 year
50 year
Dec 15 to Jan 16
FI Gilt yield

-38

-34

-32
MSCI World

-6.1%
IL Gilt yield

-31

-24

-19
FTSE 100

-2.5%
RPI sw ap

-15

-13

-13
5yr Euro CDS

+15 bps
FI Gilt/Sw ap spread

+3

+4

+2
1 year 90% FTSE 100 put

+0.6%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 January 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
115%
110%
105%
100%
95%
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
110%
108%
106%
104%
102%
100%
98%
96%
Dec funding Nominal
level:
rates:
109%
-3.2%
Real rates:
-2.7%
Growth
assets:
-4.6%
Jan funding
level:
98%
Source: Schroders, Bloomberg, 31 January 2016. Please refer to the supporting notes for further details.
Lower for longer… time to hedge your funding costs?
Gilt yields fell sharply over January amid the continuing economic turmoil
and poor performance by equity markets and oil. This resulted in a drop of
11% in our reference pension scheme’s funding level, of which almost 6%
was caused by falling yields. Short-term interest rates also fell sharply in
January with forward-starting SONIA (Sterling Over Night Index Average)
rates now at all-time lows.
1y1y SONIA forward rate* (% pa)
2.0
1.5
1.0
Since repo rates are correlated with SONIA, this presents an opportunity to
clients looking to hedge the risk of increases in funding costs. Clients
could enter into longer-dated repo, thus locking in low rates and spreads
over SONIA which may widen further. Alternatively, where appropriate,
clients could enter into forward-starting SONIA swaps to hedge this risk.
Under current market conditions, clients could lock in a funding rate which
implies no base rate hike until Q2 2017. Please contact Schroders for
further details regarding how to take advantage of low rates.
Contact us
0.5
0.0
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Source: Bloomberg
* 1 year SONIA swap starting in 1 year's time
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
31 Jan
2016
One
Month
31 Dec
2015
Three
Months
31 Oct
2015
One
Year
31 Jan
2015
5 Year
1.03%
1.45%
1.32%
0.93%
10 Year
1.66%
2.04%
1.98%
1.38%
20 Year
2.42%
2.76%
2.71%
2.05%
30 Year
2.47%
2.79%
2.76%
2.20%
50 Year
2.22%
2.54%
2.54%
2.07%
1 Month change (RHS, Bps):
Month end curve (LHS):
Nom inal rates – Gilt m arkets
4.0%
50
2.0%
0
0.0%
-50
0
10
20
30
40
50
Real rates – Index-linked gilt m arkets
5 Year
-1.22%
-0.90%
-1.05%
-1.27%
10 Year
-0.90%
-0.60%
-0.71%
-1.04%
20 Year
-0.87%
-0.63%
-0.74%
-0.95%
30 Year
-0.87%
-0.66%
-0.74%
-0.93%
50 Year
-0.99%
-0.81%
-0.88%
-0.95%
5 Year
2.63%
2.78%
2.64%
2.48%
10 Year
2.91%
3.07%
2.97%
2.73%
20 Year
3.30%
3.42%
3.39%
3.10%
30 Year
3.35%
3.46%
3.45%
3.17%
50 Year
3.34%
3.47%
3.45%
3.16%
5 Year
-0.14%
-0.14%
-0.18%
-0.26%
10 Year
0.03%
0.00%
0.02%
-0.08%
20 Year
0.55%
0.50%
0.49%
0.30%
30 Year
0.63%
0.59%
0.58%
0.40%
50 Year
0.53%
0.52%
0.50%
0.31%
2.0%
40
0.0%
0
-2.0%
-40
0
10
20
30
40
50
Inflation rates – RPI sw ap m arket
4.0%
30
2.0%
0
0.0%
-30
0
10
20
30
40
50
Nom inal gilt curve vs sw ap curve
Global bond m arkets
1.0%
10
0.0%
0
-1.0%
-10
0
10
20
30
40
50
Forw ard gilt curves
10 Year Bund
0.33%
0.63%
0.52%
0.30%
10 Yr Gilt/Bund Spread
1.23%
1.32%
1.40%
1.02%
10 Year US Treasury
1.92%
2.27%
2.14%
1.64%
10 Yr Gilt/US Spread
-0.35%
-0.30%
-0.22%
-0.31%
5 year IG CDS – Euro
93
77
71
60
5 year IG CDS – US
102
88
79
70
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
31 Jan
2016
31 Dec
2015
31 Oct
2015
31 Jan
2015
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP/USD
1.42
1.47
1.54
1.51
SONIA
0.46%
0.46%
0.46%
0.44%
GBP/EUR
1.31
1.36
1.40
1.33
3m Libor
0.59%
0.59%
0.58%
0.56%
GBP/JPY
172.6
177.2
186.1
177.0
Interest rate sw aptions as at m onth end:
1y20y
3y20y
5y20y
3y30y
5y30y
ATM* Forw ard
Par sw ap rate
1.89%
1.98%
2.02%
1.89%
1.90%
ATM* Implied volatility
0.76%
0.78%
0.74%
0.74%
0.71%
Source: Schroders, Bloomberg, 31 January 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
31 Jan
2016
31 Dec
2015
31 Oct
2015
31 Jan
2015
MSCI World
1,562
1,663
1,706
1,678
FTSE 100
6,084
6,242
6,361
6,749
S&P 500
1,940
2,044
2,079
1,995
Euro Stoxx 50
3,045
3,268
3,418
3,351
Nikkei 225
17,518
19,034
19,083
17,674
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Oct 15
Jan 16
Equity option m arket indicators (FTSE 100, 1 year)
ATM* Implied volatility
19.6%
17.1%
16.4%
16.2%
Skew (90 – 110)
5.4%
5.4%
5.3%
5.1%
ATM im plied 1 year volatility
Skew (90 vol – 110 vol)
25.0%
6.0%
20.0%
5.0%
15.0%
10.0%
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
4.0%
Jan 15
Apr 15
Jul 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
4.1%
106.9%
110.1%
3 yr
7.8%
111.0%
124.2%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread
collar call strike
(70%/95%)
1 yr
5.4%
104.2%
106.9%
3 yr
10.5%
109.2%
119.1%
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, 31 January 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 market
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 represent 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 herein 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 are 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 assumptions, economic and market conditions, models or other matters change.
For your security, communications may be taped or monitored.
Issued in February 2016 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England.
Authorised and regulated by the Financial Conduct Authority.
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