Issued in January 2016
For professional investors only
Schroders
Portfolio Solutions Monthly
December 2015
What’s (maybe) hot in 2016
As we go into 2016, we took a straw poll from Schroders’ Portfolio Solutions Team for the hot
topics of 2016:
Rates
The Fed is leading the way, and others expected to follow. Market reaction may bring volatility,
favouring realistically set triggers and potentially swaption strategies.
Regulation
Clearing, now reality rather than phoney war, may grab the headlines, but Basel III may be
bigger. Look for it to drive rising repo funding costs as well as bank preferences for par swaps,
cash CSAs and more profitable, diversified trading partners on which to spend their balance
sheet. Careful structuring of instruments and choice of trading venue become key as well as
non-traditional sources of repo financing and maybe rises in the spread of gilt yields over
swaps.
Reconsidering alpha
Mechanistic spread trading has been caught in an overweight gilt position, losing money and
struggling to trade the sizes needed. We see a return to more “traditional” ways of sourcing
return, with focus on closely controlled growth strategies, absolute return fixed income and
portable alpha as well as more subjective approaches to LDI opportunities.
Liquidity
If rate rises accelerate, LDI will need capital to support drawdowns. Having an accessible
form and the governance to supply it may be essential if we see any shocks. Cash CSAs and
clearing will also bring focus on the “liquidity ladder”.
Growth assets
Liquidity pressures and more hedging may push schemes to switch leverage to growth assets
rather than LDI. Increasingly sophisticated approaches allow access to more than just vanilla
exposure to equities, so loss of diversification isn’t the sacrifice it once was. We see leveraged
risk managed equities as a key opportunity for DB schemes.
Good or bad credit?
De-risking and low yields, push schemes towards credit. Integrating with LDI for both hedging
and liquidity will be key; think duration neutral strategies, buy and hold portfolios or synthetic
credit exposures.
In 12 months’ time we’ll see if any of these come true (or drop us a line, and tell us why we’re
wrong!)
Schroders: Portfolio Solutions Monthly
Markets dashboard
Yield changes (bps): Oct 15 to Nov 15
Risk asset m arket changes
10 year
20 year
50 year
Oct 15 to Nov 15
FI Gilt yield

-8

-6

-12
MSCI World

-0.7%
IL Gilt yield

-15

-4

-6
FTSE 100

-0.1%
RPI sw ap

+13

+1

-3
5yr Euro CDS

-1 bps
FI Gilt/Sw ap spread

+1

+6

+4
1 year 90% FTSE 100 put

+0.2%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 November 2015. 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
110%
98%
97%
100%
96%
90%
95%
80%
Nov 14
Feb 15
May 15
Aug 15
Nov 15
94%
Oct funding Nominal
level:
rates:
97%
-0.8%
Real rates:
-0.7%
Source: Schroders, Bloomberg, 30 November 2015. Please refer to the supporting notes for further details.
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Growth
assets:
-0.6%
Nov funding
level:
95%
Schroders: Portfolio Solutions Monthly
Market data: LDI markets
One
year
range
• L H•
Month
end
30 Nov
2015
One
Month
31 Oct
2015
Three
Months
31 Aug
2015
One
Year
30 Nov
2014
5 Year
1.29%
1.32%
1.37%
1.32%
10 Year
1.90%
1.98%
1.99%
2.01%
20 Year
2.65%
2.71%
2.64%
2.71%
30 Year
2.65%
2.76%
2.69%
2.86%
50 Year
2.42%
2.54%
2.46%
2.76%
1 Month change (RHS, Bps):
Month end curve (LHS):
Nom inal rates – Gilt m arkets
4.0%
20
2.0%
0
0.0%
-20
0
10
20
30
40
50
Real rates – Index-linked gilt m arkets
5 Year
-1.15%
-1.05%
-1.02%
-1.29%
10 Year
-0.85%
-0.71%
-0.77%
-0.89%
20 Year
-0.78%
-0.74%
-0.78%
-0.68%
30 Year
-0.78%
-0.74%
-0.82%
-0.63%
50 Year
-0.94%
-0.88%
-0.96%
-0.61%
5 Year
2.84%
2.64%
2.70%
2.86%
10 Year
3.10%
2.97%
3.03%
3.14%
20 Year
3.40%
3.39%
3.44%
3.47%
30 Year
3.43%
3.45%
3.51%
3.52%
50 Year
3.42%
3.45%
3.51%
3.49%
5 Year
-0.12%
-0.18%
-0.23%
-0.18%
10 Year
0.03%
0.02%
-0.04%
-0.02%
20 Year
0.55%
0.49%
0.37%
0.26%
30 Year
0.61%
0.58%
0.45%
0.35%
50 Year
0.54%
0.50%
0.36%
0.30%
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%
10
0.0%
0
-1.0%
-10
0
10
20
30
40
50
Forw ard gilt curves
10 Year Bund
0.47%
0.52%
0.74%
0.70%
4.0%
10 Yr Gilt/Bund Spread
1.35%
1.40%
1.21%
1.22%
3.0%
10 Year US Treasury
2.21%
2.14%
2.18%
2.16%
2.0%
10 Yr Gilt/US Spread
-0.37%
-0.22%
-0.21%
-0.23%
5 year IG CDS – Euro
70
71
71
58
5 year IG CDS – US
84
79
80
61
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
30 Nov
2015
31 Oct
2015
31 Aug
2015
30 Nov
2014
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP/USD
1.50
1.54
1.54
1.56
SONIA
0.46%
0.46%
0.47%
0.44%
GBP/EUR
1.42
1.40
1.38
1.26
3m Libor
0.57%
0.58%
0.59%
0.55%
GBP/JPY
185.1
186.1
187.4
185.6
Interest rate sw aptions as at m onth end:
1y20y
3y20y
5y20y
3y30y
5y30y
ATM* Forw ard
Par sw ap rate
2.12%
2.21%
2.23%
2.10%
2.11%
ATM* Implied volatility
0.76%
0.78%
0.73%
0.74%
0.70%
Source: Schroders, Bloomberg, 30 November 2015. *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
30 Nov
2015
31 Oct
2015
31 Aug
2015
30 Nov
2014
MSCI World
1,694
1,706
1,658
1,740
FTSE 100
6,356
6,361
6,248
6,723
S&P 500
2,080
2,079
1,989
2,068
Euro Stoxx 50
3,506
3,418
3,287
3,251
Nikkei 225
19,747
19,083
19,136
17,460
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Nov 14
Feb 15
May 15
Aug 15
Nov 15
Aug 15
Nov 15
Equity option m arket indicators (FTSE 100, 1 year)
ATM* Implied volatility
16.8%
16.4%
16.2%
14.1%
Skew (90 – 110)
5.4%
5.3%
4.8%
5.1%
ATM im plied 1 year volatility
Skew (90 vol – 110 vol)
20.0%
6.0%
5.0%
15.0%
4.0%
10.0%
Nov 14
Feb 15
May 15
Aug 15
Nov 15
3.0%
Nov 14
Feb 15
May 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
3.6%
106.7%
109.7%
3 yr
6.9%
111.8%
123.5%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread
collar call strike
(70%/95%)
1 yr
4.9%
104.2%
106.6%
3 yr
9.9%
109.6%
118.9%
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, 30 November 2015. *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.
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.
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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%.
schroders.com/ukpensions
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 January 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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