November 2015
For professional investors only
Schroders
Portfolio Solutions Monthly
November 2015
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%
Growth
assets:
-0.6%
Nov funding
level:
95%
Source: Schroders, Bloomberg, 30 November 2015. Please refer to the supporting notes for further details.
Are you seeing clearly now?
On 1 December 2015, the EMIR Regulatory Technical Standards (RTS) were
published in the Official Journal of the European Union (OJEU). This action
crystallises the timeline for mandatory clearing of interest rate derivatives.
Jargon Buster
Clearing: Trades are “given up” after
execution and margined via a clearing
house with the aim of reducing systemic
risk. Both counterparties post Initial
Margin to the clearing house, which can
be used to make good commitments
should one of the parties default.
The majority of pension schemes and other financial
clients, including our Schroder Matching Plus range,
are defined as “Category 3” (based largely on size
of exposure). For Category 3, interest rate swaps
will need to be cleared from 21 June 2017. This
date falls just 2 months before the pension fund exemption for clearing is currently due to expire.
The timeline means that smaller clients and more nimble businesses have the option to continue
to trade interest rate swaps as usual up to mid-2017. By contrast, the largest counterparties
effectively have to move to a “cleared world” earlier; for clearing members (Category 1) and
other counterparties with over €8 billion outstanding (Category 2), the obligation applies from 21
June 2016 and 21 December 2016 respectively.
We continue to monitor the market closely to identify if market conditions change to bring a
difference in either 1) pricing or 2) liquidity between cleared and non-cleared LDI instruments.
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
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.
2
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.
3
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 December 2015 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England.
Authorised and regulated by the Financial Conduct Authority.
4