Portfolio Solutions Monthly July 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
July 2014
Markets Dashboard
Yield changes (bps): Jun 14 to Jul 14
10 year
20 year
50 year
FI Gilt yield

-5

-13

-11
IL Gilt yield

-3

-5

RPI swap

-3

-6
FI Gilt / Swap spread

+1

+0
Risk asset market changes:
Jun 14 to Jul 14
MSCI All World

-1.3%
-4
FTSE 100

-0.2%

-8
5yr Euro CDS

+3 bps

+3
1 year 90% FTSE 100 put

+0.2%
Source: Schroders, 31 July 2014.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse,
31 July 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
113%
130%
120%
111%
110%
110%
100%
108%
90%
Jul 13
Oct 13
Jan 14
Apr 14
Jul 14
Jun
Nominal
funding rates:
level:
-1.1%
112%
Real
rates:
-0.6%
Growth
Jul
assets: funding
-1%
level:
109%
Source: Schroders, Bloomberg, 31 July 2014. Please refer to the supporting notes for further details.
July commentary


The Pension Consultation results were released on 22 July stating that transfers out of defined benefit
schemes will continue to be allowed. This however had little if any impact on continuing LDI demand,
substantiated in the syndication of the 2058 index-linked gilt. The syndication brought the DMO book to
over £14bn in size with a supply of only £5bn. With a low chance of another linker syndicated offering this
calendar year, insatiable demand remains putting continued downward pressure on real yields.
Early July saw the lowest level of implied volatility since 2007 at 10.3, although this was short-lived as
geopolitical events such as the Malaysian Airlines flight caused the VIX to revert back towards the year-todate average. The VIX finished the month at 17.0, the highest level since April, following the default of
Argentina and bailout of Portuguese bank Banco Espirito Santo. Global equities have retreated over the
month.
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 July 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
end
31 Jul
2014
One
Month
30 Jun
2014
Three
Months
30 Apr
2014
One
Year
31 Jul
2013
Month end curve
Nominal rates - Gilt markets
5 Year
2.04%
2.05%
1.91%
1.26%
10 Year
2.82%
2.87%
2.86%
2.64%
20 Year
3.39%
3.52%
3.57%
3.61%
30 Year
3.48%
3.62%
3.65%
3.84%
50 Year
3.33%
3.44%
3.49%
3.69%
1 Month change (RHS, Bps):
5.0%
20
2.5%
0
0
10
20
30
40
50
0.0%
-20
Real rates - Index-linked gilt markets
5 Year
-0.94%
-0.91%
-1.07%
-1.48%
10 Year
-0.32%
-0.29%
-0.32%
-0.51%
20 Year
-0.11%
-0.06%
-0.02%
0.05%
30 Year
-0.10%
-0.04%
-0.02%
0.07%
50 Year
-0.14%
-0.10%
-0.09%
0.02%
5 Year
3.11%
3.10%
3.13%
3.08%
10 Year
3.25%
3.28%
3.29%
3.30%
20 Year
3.53%
3.58%
3.59%
3.65%
30 Year
3.57%
3.64%
3.65%
3.74%
50 Year
3.57%
3.65%
3.67%
3.76%
5 Year
-0.18%
-0.15%
-0.15%
-0.14%
10 Year
0.02%
0.01%
0.04%
0.06%
20 Year
0.19%
0.19%
0.22%
0.21%
30 Year
0.27%
0.25%
0.25%
0.30%
50 Year
0.18%
0.15%
0.17%
0.26%
10 Year Bund
1.16%
1.25%
1.47%
1.67%
10 Yr Gilt / Bund Spread
1.43%
1.41%
1.18%
0.68%
10 Year US Treasury
2.56%
2.53%
2.65%
2.58%
10 Yr Gilt / US Spread
0.04%
0.14%
0.02%
-0.21%
5 year IG CDS - Euro
65
62
70
100
5 year IG CDS - US
64
59
64
75
2.0%
20
0.0%
0
-2.0%
-20
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
40
50
Forward gilt curves
5.0%
2.5%
Gilt curve
3 yrs fwd
0.0%
0
Currency rates
Money markets
1 yr fwd
5 yrs fwd
10
20
30
40
50
31 Jul
2014
30 Jun
2014
30 Apr
2014
31 Jul
2013
1.52
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.69
1.71
1.69
SONIA
0.45%
0.45%
0.42%
0.37%
GBP / EUR
1.26
1.25
1.22
1.14
3m Libor
0.56%
0.55%
0.53%
0.51%
GBP / JPY
173.6
173.3
172.5
148.9
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
3.22%
3.38%
3.43%
3.32%
3.35%
ATM* Implied volatility
59.1
63.7
65.3
59.9
59.9
Source: Schroders, Bloomberg, 31 July 2014. *At the money. All data as at month end allowing for UK trading days.
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Portfolio Solutions Monthly July 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
end
31 Jul
2014
One
Month
30 Jun
2014
Three
Months
30 Apr
2014
One
Year
31 Jul
2013
Equity indices
MSCI All World
202
204
199
179
FTSE 100
6,730
6,744
6,780
6,621
S&P 500
1,931
1,960
1,884
1,686
Euro Stoxx 50
3,116
3,228
3,198
2,768
Nikkei 225
15,621
15,162
14,304
13,668
13.1%
15.8%
4.0%
4.0%
MSCI All World Total Return (re-based to 100)
140
120
100
80
Jul 13
Oct 13
Jan 14
Apr 14
Jul 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.6%
13.0%
Skew (110 - 90)
4.5%
4.3%
ATM implied 1 year volatility
20.0%
15.0%
Skew (110 vol - 90 vol)
5.0%
4.0%
10.0%
Jul 13
Oct 13
Jan 14
Apr 14
Jul 14
3.0%
Jul 13
Oct 13
Jan 14
Apr 14
Jul 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
2.2%
108.0%
3 yr
5.4%
118.2%
125.9%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.3%
105.0%
106.1%
3 yr
6.8%
114.0%
120.0%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 July 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 OverThe-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 July 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 August 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS03249
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