Portfolio Solutions Monthly January 2015
For professional investors only
Schroders
Portfolio Solutions Monthly
January 2015
Markets dashboard
Yield changes (bps): Dec 14 to Jan 15
10 year
20 year
50 year
Risk asset market changes:
Dec 14 to Jan 15
FI Gilt yield
 -44
 -48
 -50
MSCI All World

-2.7%
IL Gilt yield
 -10
 -20
 -26
FTSE 100

+2.8%
RPI swap
FI Gilt / Swap
spread
 -33
 -27
 -25

-3 bps
 -3
 +2
 -1
5yr Euro CDS
1 year 90% FTSE 100
put

+0.3%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 January 2015. Change in 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 January 2015. Please refer to the supporting notes for further details.
News from the continent
After a 2nd half of 2014 to forget for pension schemes, the pain continued into January 2015 with a dramatic
fall in fixed and real yields. Financial news has been dominated by Europe over the past month. A few
snippets noted below:
Zurich, 15 January – The Swiss National Bank surprised the market by discontinuing its minimum exchange
rate of CHF 1.2 per Euro and lowering its target range for 3-month CHF Libor to -1.25% to -0.25% p.a. The
Swiss Franc appreciated by over 20% on the day of the announcement.
Frankfurt, 22 January – Mario Draghi announced the promise of “European QE Infinity”. The program will
involve €60bn of bond purchases per month until Euro inflation sees a sustained move towards its 2% target.
Although the total quantum of the program took the market by surprise, this announcement had been widely
expected and was the main driver of falling yields over January.
Brussels, 3 February – The European Commission released a report into the market’s ability to support
cash variation margin requirements for central clearing. Their report estimated the component cost of this
part of clearing alone could cost UK pension schemes 2.3% of their funding level over the next 40 years.
With other embedded clearing house, clearing member and implicit costs not modelled, they recommended
that the pension scheme exemption is extended to at least August 2017.
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.
Portfolio Solutions Monthly January 2015
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
30 Jan 31 Dec 31 Oct 31 Jan
2015
2014
2014
2014
Month end curve
Nominal rates - Gilt markets
5 Year
0.93%
1.23%
1.59%
1.83%
10 Year
1.38%
1.82%
2.34%
2.86%
20 Year
2.05%
2.53%
3.03%
3.61%
30 Year
2.20%
2.69%
3.18%
3.71%
50 Year
2.07%
2.57%
3.06%
3.53%
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
-1.27%
-1.32%
-1.04%
-1.10%
10 Year
-1.04%
-0.94%
-0.60%
-0.25%
20 Year
-0.95%
-0.75%
-0.42%
0.04%
30 Year
-0.93%
-0.69%
-0.38%
0.04%
50 Year
-0.95%
-0.69%
-0.40%
-0.01%
5 Year
2.48%
2.86%
2.86%
3.10%
10 Year
2.73%
3.06%
3.12%
3.27%
20 Year
3.10%
3.37%
3.50%
3.58%
30 Year
3.17%
3.43%
3.56%
3.64%
50 Year
3.16%
3.41%
3.52%
3.64%
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
5 Year
-0.26%
-0.23%
-0.21%
-0.14%
10 Year
-0.08%
-0.04%
-0.03%
0.00%
20 Year
0.30%
0.28%
0.22%
0.23%
30 Year
0.40%
0.39%
0.32%
0.29%
50 Year
0.31%
0.32%
0.24%
0.20%
Global bond markets
0.5%
5
0.0%
0
-0.5%
-5
0
10
20
30
40
50
Forward gilt curves
3.0%
10 Year Bund
0.30%
0.54%
0.84%
1.66%
10 Yr Gilt / Bund Spread
1.02%
1.21%
1.39%
1.03%
10 Year US Treasury
1.64%
2.17%
2.34%
2.64%
10 Yr Gilt / US Spread
-0.31%
-0.41%
-0.09%
0.06%
1.0%
5 year IG CDS - Euro
60
63
65
82
0.0%
5 year IG CDS - US
70
66
64
72
2.0%
Gilt curve
3 yrs fwd
0
Currency rates
Money markets
10
20
1 yr fwd
5 yrs fwd
30
40
50
30 Jan 31 Dec
2015
2014
31 Oct
2014
31 Jan
2014
1.64
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.51
1.56
1.60
SONIA
0.44%
0.44%
0.44%
0.43%
GBP / EUR
1.33
1.29
1.28
1.22
3m Libor
0.56%
0.56%
0.55%
0.52%
GBP / JPY
177.0
186.6
179.7
167.7
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
1.77%
1.86%
1.91%
1.85%
1.88%
ATM* Implied volatility
85.0
80.8
74.5
77.6
71.0
Source: Schroders, Bloomberg, 31 January 2015. *At the money. All data as at month end allowing for UK trading days.
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Portfolio Solutions Monthly January 2015
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
30 Jan 31 Dec 31 Oct 31 Jan
2015
2014
2014
2014
Equity indices
MSCI All World
189
194
197
186
FTSE 100
6,749
6,566
6,546
6,510
S&P 500
1,995
2,059
2,018
1,783
Euro Stoxx 50
3,351
3,146
3,113
3,014
Nikkei 225
17,674
17,451
16,414
14,915
13.7%
15.4%
5.3%
4.3%
MSCI All World Total Return (re-based to 100)
120
100
80
Jan 14
May 14
Jul 14
Oct 14
Jan 15
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
16.2%
16.2%
Skew (90 - 110)
5.1%
5.1%
ATM implied 1 year volatility
20.0%
Skew (90 vol - 110 vol)
6.0%
5.0%
15.0%
4.0%
10.0%
Jan 14
May 14
Jul 14
Oct 14
Jan 15
3.0%
Jan 14
May 14
Jul 14
Oct 14
Jan 15
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.9%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
3.9%
106.9%
3 yr
7.3%
114.5%
127.8%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
5.1%
104.2%
106.7%
3 yr
10.7%
109.2%
119.4%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 January 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 January 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 January 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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