Portfolio Solutions Monthly August 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
Markets Dashboard
Yield changes (bps): Jul 14 to Aug 14
10 year
20 year
50 year
Risk asset market changes:
Jul 14 to Aug 14
FI Gilt yield

-37

-37

-33
MSCI All World

+1.5%
IL Gilt yield

-32

-28

-22
FTSE 100

+1.3%
RPI swap

-5

-9

-9
5yr Euro CDS

-5 bps
FI Gilt / Swap spread

-4

-1

-1
1 year 90% FTSE 100 put

+0.5%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 29
August 2014. Change in put is the outright change in premium.
Source: Schroders, 29 August 2014.
Funding level dashboard
1 year reference funding level progression
1 month attribution of funding level change
130%
120%
110%
100%
90%
Aug 13
Nov 13
Feb 14
May 14
Aug 14
Source: Schroders, Bloomberg, 29 August 2014. Please refer to the supporting notes for further details.
August commentary
August saw significant falls in yields across nominal and real curves driven by a “perfect storm” of geopolitical and
economic developments – below we set out the key drivers of moves in each part of the curve:
 Short-term (0-5 years): Release of the Bank of England’s inflation report was peppered with dovish comments,
forcing markets to push back rate hike increase expectations to early 2015. This was despite the MPC minutes
revealing 2 dissenting members in the base rate vote – the first split vote in over three years.
 Medium-term (5-15 years): Falling yields in the belly of the curve were primarily driven by heightened
geopolitical risk, focussing on the Middle East and Eastern Europe. Closer to home, concerns regarding future
European economic growth and reduced inflationary pressure added additional downward pressure on yields.
 Long-term (15+ years): Aside from the impact of short dated rates falling, longer dated yields were also
impacted by strong LDI buying. The level of demand for long index-linked gilts is illustrated by the 29 July 2058s
syndication. The auction drew £14.5bn of orders for a final deal size of £5.4bn.
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 August 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
end
29 Aug
2014
One
Month
31 Jul
2014
Three
One
Months Year
31 May 31 Aug
2014
2013
Month end curve
Nominal rates - Gilt markets
5 Year
1.73%
2.04%
1.85%
1.61%
10 Year
2.44%
2.82%
2.76%
2.89%
20 Year
3.02%
3.39%
3.48%
3.70%
30 Year
3.12%
3.48%
3.59%
3.83%
50 Year
3.00%
3.33%
3.42%
3.71%
1 Month change (RHS, Bps):
5.0%
40
20
2.5%
0
10
20
30
0
50 -20
40
0.0%
-40
Real rates - Index-linked gilt markets
5 Year
-1.14%
-0.94%
-1.08%
-1.31%
10 Year
-0.64%
-0.32%
-0.38%
-0.31%
20 Year
-0.38%
-0.11%
-0.10%
0.04%
30 Year
-0.35%
-0.10%
-0.08%
0.05%
50 Year
-0.36%
-0.14%
-0.15%
0.00%
5 Year
3.03%
3.11%
3.05%
3.13%
10 Year
3.20%
3.25%
3.23%
3.35%
20 Year
3.44%
3.53%
3.56%
3.69%
30 Year
3.49%
3.57%
3.63%
3.77%
50 Year
3.48%
3.57%
3.64%
3.76%
5 Year
-0.20%
-0.18%
-0.15%
-0.13%
10 Year
-0.02%
0.02%
0.03%
0.08%
20 Year
0.17%
0.19%
0.20%
0.25%
30 Year
0.27%
0.27%
0.25%
0.31%
50 Year
0.18%
0.18%
0.16%
0.27%
2.0%
40
20
0
-20
-40
0.0%
-2.0%
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
20
2.5%
0
0.0%
-20
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
50
Forward gilt curves
10 Year Bund
0.89%
1.16%
1.36%
1.86%
10 Yr Gilt / Bund Spread
1.46%
1.43%
1.20%
0.90%
10 Year US Treasury
2.34%
2.56%
2.48%
2.78%
10 Yr Gilt / US Spread
0.02%
0.04%
0.09%
-0.01%
5 year IG CDS - Euro
60
65
66
107
5 year IG CDS - US
57
64
62
84
5.0%
2.5%
Gilt curve
3 yrs fwd
1 yr fwd
5 yrs fwd
0.0%
0
Currency rates
Money markets
10
20
30
29 Aug
2014
31 Jul
2014
1.66
1.69
40
50
31 May 31 Aug
2014
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
SONIA
0.45%
0.45%
0.42%
0.41%
GBP / EUR
1.26
1.26
1.23
1.17
3m Libor
0.56%
0.56%
0.53%
0.52%
GBP / JPY
172.8
173.6
170.5
152.2
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
1.68
ATM* Forward
Par swap rate
2.88%
3.01%
3.07%
2.96%
2.99%
ATM* Implied volatility
64.3
66.2
65.1
60.4
60.4
Source: Schroders, Bloomberg, 29 August 2014. *At the money. All data as at month end allowing for UK trading days.
2
40
1.55
Portfolio Solutions Monthly August 2014
For professional investors only
Market data: Risk management strategies
Month
end
29 Aug
2014
One
Month
31 Jul
2014
MSCI All World
205
202
201
174
FTSE 100
6,820
6,730
6,845
6,413
S&P 500
2,003
1,931
1,924
1,633
Euro Stoxx 50
3,173
3,116
3,245
2,721
Nikkei 225
15,425
15,621
14,632
13,389
12.8%
16.4%
4.2%
4.3%
One
year
range
•L H•
Three
One
Months Year
31 May 31 Aug
2014
2013
Equity indices
MSCI All World Total Return (re-based to 100)
140
120
100
80
Aug 13
Nov 13
Feb 14
May 14
Aug 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.2%
13.6%
Skew (110 - 90)
4.5%
4.5%
ATM implied 1 year volatility
20.0%
15.0%
Skew (110 vol - 90 vol)
5.0%
4.0%
10.0%
Aug 13
Nov 13
Feb 14
May 14
Aug 14
3.0%
Aug 13
Nov 13
Feb 14
May 14
Aug 14
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.0%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
2.7%
107.2%
3 yr
5.9%
116.6%
127.7%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.9%
104.5%
106.0%
3 yr
9.0%
110.1%
118.0%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 29 August 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 August 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 September 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V
7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS03305
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