Portfolio Solutions Monthly November 2014 For professional investors only Schroders Portfolio Solutions Monthly November 2014 Markets Dashboard Yield changes (bps): Oct 14 to Nov 14 10 year 20 year 50 year Risk asset market changes: Oct 14 to Nov 14 FI Gilt yield IL Gilt yield RPI swap -33 -29 +2 -32 -26 -4 -30 -21 -3 MSCI All World FTSE 100 5yr Euro CDS +0.6% +2.7% -7 bps FI Gilt / Swap spread +1 +3 +6 1 year 90% FTSE 100 put -0.1% Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 28 November 2014. 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, 28 November 2014. Please refer to the supporting notes for further details. Gilt yield dynamics – key drivers for gilt yields in 2015 Current economic and political conditions offer the potential for a volatile gilt market in 2015. Below we summarise the current key drivers for gilt markets: Lower Yields Higher Yields Domestic drivers Soft domestic data and disinflation further push back rates increases Government introduces a UK deficit reduction plan deemed achievable by markets Strong real wage growth and / or GDP growth prompts earlier interest rate hikes Further deterioration of UK fiscal position Political and fiscal uncertainty due to 2015 general election Global drivers Continued soft EU data with limited ECB Euro area economic improvement and / or fiscal response easing policies adopted Euro QE drives gilt demand in a hunt for Implementation of euro QE seen to improve yield future growth prospects, sparking gilt sell off Contact us The Schroders Portfolio Solutions team partners with investors to provide risk management strategies across all major financial markets. 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 November 2014 For professional investors only Market data: LDI markets One year range •L H• Month end 30 Nov 2014 One Month 31 Oct 2014 Three One Months Year 31 Aug 30 Nov 2014 2013 Month end curve Nominal rates - Gilt markets 5 Year 1.32% 1.59% 1.73% 1.68% 10 Year 2.01% 2.34% 2.44% 2.92% 20 Year 2.71% 3.03% 3.02% 3.71% 30 Year 2.86% 3.18% 3.12% 3.82% 50 Year 2.76% 3.06% 3.00% 3.64% 1 Month change (RHS, Bps): 5.0% 35 2.5% 0 0 10 20 30 40 50 0.0% -35 Real rates - Index-linked gilt markets 5 Year -1.29% -1.04% -1.14% -1.20% 10 Year -0.89% -0.60% -0.64% -0.29% 20 Year -0.68% -0.42% -0.38% 0.02% 30 Year -0.63% -0.38% -0.35% 0.02% 50 Year -0.61% -0.40% -0.36% -0.06% 5 Year 2.86% 2.86% 3.03% 3.07% 10 Year 3.14% 3.12% 3.20% 3.32% 20 Year 3.47% 3.50% 3.44% 3.68% 30 Year 3.52% 3.56% 3.49% 3.74% 50 Year 3.49% 3.52% 3.48% 3.73% 2.0% 35 0.0% 0 -2.0% -35 0 10 20 30 40 50 Inflation rates - RPI swap market 5.0% 5 2.5% 0 0.0% -5 0 10 20 30 40 50 Nominal gilt curve vs swap curve 5 Year -0.18% -0.21% -0.20% -0.10% 10 Year -0.02% -0.03% -0.02% 0.08% 20 Year 0.26% 0.22% 0.17% 0.26% 30 Year 0.35% 0.32% 0.27% 0.33% 50 Year 0.30% 0.24% 0.18% 0.29% Global bond markets 0.5% 10 5 0 -5 -10 0.0% -0.5% 0 10 20 30 40 50 Forward gilt curves 10 Year Bund 0.70% 0.84% 0.89% 1.69% 10 Yr Gilt / Bund Spread 1.22% 1.39% 1.46% 1.06% 10 Year US Treasury 2.16% 2.34% 2.34% 2.74% 10 Yr Gilt / US Spread -0.23% -0.09% 0.02% 0.02% 5 year IG CDS - Euro 58 65 60 79 5 year IG CDS - US 61 64 57 70 4.0% 2.0% Gilt curve 3 yrs fwd 0.0% 0 Currency rates Money markets 1 yr fwd 5 yrs fwd 10 20 30 Nov 2014 30 40 50 31 Oct 31 Aug 30 Nov 2014 2014 2013 Bank of England base 0.50% 0.50% 0.50% 0.50% GBP / USD 1.56 1.60 1.66 SONIA 0.44% 0.44% 0.45% 0.42% GBP / EUR 1.26 1.28 1.26 1.20 3m Libor 0.55% 0.55% 0.56% 0.52% GBP / JPY 185.6 179.7 172.8 167.7 3y20y 5y20y 3y30y 5y30y Interest rate swaptions as at month end: 1y20y ATM* Forward Par swap rate 2.48% 2.64% 2.72% 2.61% 2.66% ATM* Implied volatility 70.0 70.5 68.0 66.7 62.8 Source: Schroders, Bloomberg, 28 November 2014. *At the money. All data as at month end allowing for UK trading days. 2 1.64 Portfolio Solutions Monthly November 2014 For professional investors only Market data: Risk management strategies One year range •L H• Month One end Month 30 Nov 31 Oct 2014 2014 Three One Months Year 31 Aug 30 Nov 2014 2013 Equity indices MSCI All World 198 197 205 191 FTSE 100 6,723 6,546 6,820 6,651 S&P 500 2,068 2,018 2,003 1,806 Euro Stoxx 50 3,251 3,113 3,173 3,087 Nikkei 225 17,460 16,414 15,425 15,662 MSCI All World Total Return (re-based to 100) 120 100 80 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Equity option market indicators (FTSE 100, 1 year) ATM* Implied volatility 14.1% 13.7% 13.2% 14.8% Skew (110 - 90) 5.1% 5.3% 4.5% 3.9% ATM implied 1 year volatility 20.0% Skew (110 vol - 90 vol) 6.0% 5.0% 15.0% 4.0% 10.0% Nov 13 Feb 14 May 14 Aug 14 Nov 14 3.0% Nov 13 Feb 14 May 14 Aug 14 Nov 14 Equity risk management strategy indicators (FTSE 100 total return, spot prices) Zero cost put spread collar call strike (70% / 90%) 109.6% 90% Put Zero cost collar call strike (90% Put) 1 yr 2.9% 107.3% 3 yr 6.1% 115.7% 127.7% 95% Put Zero cost collar call strike (95% Put) Zero cost put spread collar call strike (70% / 95%) 1 yr 4.1% 104.5% 106.3% 3 yr 9.3% 109.7% 118.3% NB - one year range indicators for equity risk management strategies are based on month end values. Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 28 November 2014. *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 Portfolio Solutions Monthly November 2014 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 December 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. 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