For professional investors only
Schroders
Portfolio Solutions Monthly
August 2015
Markets Dashboard
Yield changes (bps): Jul 15 to Aug 15
10 year
FI Gilt yield

IL Gilt yield
RPI swap
FI Gilt / Swap spread
20 year
50 year
Risk asset market changes:
Jul 15 to Aug 15
-4

+1

+1
MSCI All World


+8

+6

+2
FTSE 100

-6.7%

-10

-1

+2
5yr Euro CDS

+9 bps

-2

+1

-1
1 year 90% FTSE 100 put

+1.5%
-6.1%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 August 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
Source: Schroders, Bloomberg, 31 August 2015. Please refer to the supporting notes for further details.
Coverage correlation conundrum
UK DB pension schemes without views on the direction of longterm interest rates (‘rates’) and implied inflation (‘inflation’) but
with an objective of defending their funding level will often have
coverage targets equal to their overall level of assets. After all,
the level of assets needs to change in the same proportion as
liabilities but not necessarily monetary amount.
These schemes will have return targets to meet as part of their
actuarial valuations and therefore utilise LDI solutions to give
their desired coverage level alongside a portfolio of growth
Source: Schroders. Bloomberg. Daily correlations measured over a backward
looking rolling 1 year window, 31 August 2015
assets.
Liability proxy: 20-year index-linked gilt
The question of optimal coverage level then becomes how
Equity: MSCI World GBP Price Index
Credit Spread: CDX Index
correlated your growth assets are to your liabilities. If growth
And (ii) is their LDI solution capital efficient
assets are positively correlated to liabilities then they take up
enough to provide this?
some of the slack of an LDI portfolio and less than 100% of
assets is an optimal coverage level. The converse is also true.
The graph to the above right looks at the correlations between a
liability proxy for a UK DB scheme and equity as well as credit
indices over a five year period. The “risk-on, risk-off” equitybond market paradigm has lead to a negative correlation over
this period. This naturally leads schemes to question: (i) is
100% of assets coverage level really enough for schemes
who don’t want to make a call on the direction of yields?
Portfolio Solutions Monthly August 2015
For professional investors only
Market data: LDI markets
One year
range
•L H•
Month
end
31 Aug
2015
One
Month
31 Jul
2015
Three
Months
31 May
2015
One Year
31 Aug
2014
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.37%
1.45%
1.31%
1.73%
10 Year
1.99%
2.04%
1.93%
2.44%
20 Year
2.64%
2.63%
2.57%
3.02%
30 Year
2.69%
2.68%
2.67%
3.12%
50 Year
2.46%
2.45%
2.48%
3.00%
1 Month change (RHS, Bps):
5.0%
60
2.5%
0
0
10
20
30
40
50
0.0%
-60
Real rates - Index-linked gilt markets
5 Year
-1.02%
-1.16%
-1.23%
-1.14%
10 Year
-0.77%
-0.85%
-0.90%
-0.64%
20 Year
-0.78%
-0.84%
-0.85%
-0.38%
30 Year
-0.82%
-0.84%
-0.84%
-0.35%
50 Year
-0.96%
-0.99%
-0.93%
-0.36%
5 Year
2.70%
2.89%
2.86%
3.03%
10 Year
3.03%
3.14%
3.09%
3.20%
20 Year
3.44%
3.45%
3.44%
3.44%
30 Year
3.51%
3.49%
3.50%
3.49%
50 Year
3.51%
3.50%
3.53%
3.48%
2.0%
30
0.0%
0
-2.0%
-30
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
40
2.5%
0
0.0%
-40
0
10
20
30
40
50
Nominal gilt curve vs swap curve
0.5%
10
0.0%
0
5 Year
-0.23%
-0.23%
-0.19%
-0.20%
10 Year
-0.04%
-0.02%
0.00%
-0.02%
20 Year
0.37%
0.36%
0.37%
0.17%
30 Year
0.45%
0.45%
0.45%
0.27%
50 Year
0.36%
0.37%
0.37%
0.18%
10 Year Bund
0.74%
0.64%
0.49%
0.89%
4.0%
10 Yr Gilt / Bund Spread
1.21%
1.23%
1.32%
1.46%
3.0%
10 Year US Treasury
2.18%
2.18%
2.12%
2.34%
2.0%
10 Yr Gilt / US Spread
-0.21%
-0.29%
-0.30%
0.02%
1.0%
Global bond markets
-0.5%
-10
0
10
20
30
40
50
Forward gilt curves
5 year IG CDS - Euro
71
62
66
60
5 year IG CDS - US
80
70
64
57
1 yr fwd
3 yrs fwd
5 yrs fwd
0.0%
0
Currency rates
Money markets
Gilt curve
10
20
30
31 Aug
2015
31 Jul
2015
40
50
31 May 31 Aug
2015
2014
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.54
1.56
1.53
SONIA
0.47%
0.47%
0.46%
0.45%
GBP / EUR
1.38
1.42
1.39
1.26
3m Libor
0.59%
0.58%
0.57%
0.56%
GBP / JPY
187.4
193.6
189.8
172.8
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
2.32%
2.42%
2.44%
2.34%
2.33%
ATM* Implied volatility
81.8
85.8
75.2
79.4
72.6
Source: Schroders, Bloomberg, 31 August 2015. *At the money. All data as at month end allowing for UK trading days.
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1.66
Portfolio Solutions Monthly August 2015
For professional investors only
Market data: Risk management strategies
Month
end
31 Aug
2015
One
Month
31 Jul
2015
Three
Months
31 May
2015
MSCI World
1,658
1,766
1,779
1,749
FTSE 100
6,248
6,696
6,984
6,820
One year
range
•L H•
One Year
31 Aug
2014
Equity indices
S&P 500
1,989
2,104
2,107
2,003
Euro Stoxx 50
3,287
3,601
3,571
3,173
Nikkei 225
19,136
20,585
20,563
15,425
13.7%
14.4%
13.2%
4.6%
4.6%
4.5%
MSCI All World Total Return (re-based to 100)
120
100
80
Aug 14
Nov 14
Feb 15
May 15
Aug 15
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
Skew (90 - 110)
16.2%
4.8%
ATM implied 1 year volatility
Skew (90 vol - 110 vol)
20.0%
6.0%
5.0%
15.0%
4.0%
10.0%
Aug 14
Nov 14
Feb 15
May 15
Aug 15
3.0%
Aug 14
Nov 14
Feb 15
May 15
Aug 15
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
110.9%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
4.4%
107.3%
3 yr
7.3%
113.8%
127.1%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
5.7%
104.5%
107.5%
3 yr
10.0%
110.2%
119.5%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 August 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.
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.
3
Portfolio Solutions Monthly August 2015
For professional investors only
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 September 2015 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V
7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.
INS04256
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