Portfolio Solutions Monthly June 2015
For professional investors only
Schroders
Portfolio Solutions Monthly
June 2015
Markets Dashboard
Yield changes (bps): May 15 to Jun 15
10 year
20 year
50 year
Risk asset market changes:
May 15 to Jun 15
FI Gilt yield

+26

+22

+15
MSCI All World

-2.5%
IL Gilt yield

+10

+13

+9
FTSE 100

-6.6%
RPI swap

+13

+6

+0
5yr Euro CDS

+9 bps
FI Gilt / Swap spread

-1

-1

+3
1 year 90% FTSE 100 put

+0.2%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 June 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, 30 June 2015. Please refer to the supporting notes for further details.
Equities: getting volatile
In April we looked at volatility in the bond market and
how it has increased in 2015. Unsurprisingly, we are
seeing a similar pattern in the equity market. The
CBOE Volatility Index (VIX) is a measure of the
implied volatility of S&P 500 stock index options. It is
commonly used to measure the market’s expectation
of stock market volatility over the next 30 day period
(and is sometimes referred to as the fear index!).
The chart on the right categorises the levels of the
VIX since the beginning of 2013. Over this time,
while the index averaged a level of 14.4, 2015 has
experienced higher volatility with the VIX over 15
more often than it has been in the past 2.5 years and
on 5% of the days, the level has been over 20. Now
is a good time for schemes to re-evaluate their equity
investments and potentially introduce diversification
or possibly add some volatility control strategies to
their existing investments.
Level of VIX
2015 to date
H2 2014
H1 2014
All 2013
25 to 30
20 to 25
15 to 20
13 to 15
10 to 13
0%
20%
40%
Source: Schroders, Bloomberg to 30 June 2015
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.
60%
Portfolio Solutions Monthly June 2015
For professional investors only
Market data: LDI markets
One year
range
•L H•
Month
end
30 Jun
2015
One
Month
31 May
2015
Three
One Year
Months
31 Mar
30 Jun 2014
2015
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.52%
1.31%
1.12%
2.05%
10 Year
2.19%
1.93%
1.66%
2.87%
20 Year
2.80%
2.57%
2.34%
3.52%
30 Year
2.86%
2.67%
2.47%
3.62%
50 Year
2.63%
2.48%
2.35%
3.44%
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
2.0%
30
0.0%
0
5 Year
-1.22%
-1.23%
-1.22%
-0.91%
10 Year
-0.80%
-0.90%
-0.98%
-0.29%
20 Year
-0.72%
-0.85%
-0.88%
-0.06%
30 Year
-0.69%
-0.84%
-0.87%
-0.04%
50 Year
-0.84%
-0.93%
-0.91%
-0.10%
5 Year
3.01%
2.86%
2.69%
3.10%
10 Year
3.22%
3.09%
2.94%
3.28%
20 Year
3.50%
3.44%
3.30%
3.58%
30 Year
3.52%
3.50%
3.36%
3.64%
50 Year
3.53%
3.53%
3.35%
3.65%
5 Year
-0.21%
-0.19%
-0.22%
-0.15%
10 Year
-0.01%
0.00%
-0.03%
0.01%
20 Year
0.35%
0.37%
0.37%
0.19%
30 Year
0.46%
0.45%
0.45%
0.25%
50 Year
0.39%
0.37%
0.38%
0.15%
10 Year Bund
0.76%
0.49%
0.18%
1.25%
10 Yr Gilt / Bund Spread
1.25%
1.32%
1.39%
1.41%
10 Year US Treasury
2.35%
2.12%
1.92%
2.53%
10 Yr Gilt / US Spread
-0.32%
-0.30%
-0.34%
0.14%
1.0%
5 year IG CDS - Euro
75
66
56
62
0.0%
5 year IG CDS - US
70
64
64
59
-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
Global bond markets
0.5%
10
0.0%
0
-0.5%
-10
0
10
20
30
40
50
Forward gilt curves
3.0%
2.0%
Gilt curve
3 yrs fwd
0
Currency rates
Money markets
10
20
1 yr fwd
5 yrs fwd
30
40
50
30 Jun 31 May 31 Mar
2015
2015
2015
30 Jun
2014
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.57
1.53
1.48
SONIA
0.46%
0.46%
0.45%
0.45%
GBP / EUR
1.41
1.39
1.38
1.25
3m Libor
0.58%
0.57%
0.57%
0.55%
GBP / JPY
192.0
189.8
178.0
173.2
Interest rate swaptions as at month end:
1y20y
3y20y
5y20y
3y30y
5y30y
ATM* Forward
Par swap rate
2.45%
2.55%
2.57%
2.45%
2.45%
ATM* Implied volatility
84.3
80.9
75.5
77.5
71.8
Source: Schroders, Bloomberg, 30 June 2015. *At the money. All data as at month end allowing for UK trading days.
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1.71
Portfolio Solutions Monthly June 2015
For professional investors only
Market data: Risk management strategies
Month
end
30 Jun
2015
One
Month
31 May
2015
MSCI World
1,736
1,779
1,741
1,743
FTSE 100
6,521
6,984
6,773
6,744
One year
range
•L H•
Three
One Year
Months
31 Mar
30 Jun 2014
2015
Equity indices
S&P 500
2,063
2,107
2,068
1,960
Euro Stoxx 50
3,424
3,571
3,697
3,228
Nikkei 225
20,236
20,563
19,207
15,162
14.4%
15.6%
13.0%
4.6%
4.8%
4.3%
MSCI All World Total Return (re-based to 100)
120
100
80
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
Skew (90 - 110)
15.6%
4.8%
ATM implied 1 year volatility
Skew (90 vol - 110 vol)
20.0%
6.0%
5.0%
15.0%
4.0%
10.0%
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
3.0%
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.4%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
3.3%
107.1%
3 yr
6.1%
114.3%
125.3%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
4.5%
104.4%
106.3%
3 yr
9.5%
110.5%
119.3%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 June 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.
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Portfolio Solutions Monthly June 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
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Issued in July 2015 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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