Portfolio Solutions Monthly April 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
April 2014
Markets Dashboard
Yield changes (bps): Mar 14 to Apr 14
10 year
20 year
50 year
Risk asset market changes:
Mar 14 to Apr 14
FI Gilt yield
IL Gilt yield
RPI swap



-6
-8
+0



-5
-3
-2



-8
-2
-1
MSCI All World
FTSE 100
5yr Euro CDS



+1.3%
+2.8%
-6 bps
FI Gilt / Swap spread

+1

-1

-8
1 year 90% FTSE 100 put

-0.2%
Source: Schroders, 30 April 2014.
Source: Schroders, Bloomberg, Merrill Lynch, Credit
Suisse, 30 April 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, 30 April 2014. Please refer to the supporting notes for further details.
April economic commentary





Events in Eastern Europe were the key driver of markets over the month. In particular, a risk off
sentiment served to drive gilt yields down across the curve, impacting on funding levels.
Despite the risk off moves, equity markets still managed to perform positively off the back of a generally
positive set of quarterly earnings reports.
In the UK, April marked the official move away from Forward Guidance as unemployment figures again
surprised markets, dipping below 7.0%.
The continued improvement in UK unemployment headline figures has prompted much debate amongst
gilt market participants. This has focused on the rise in the proportion of self-employed workers and
increased levels of part time workers and the potential for these shifts to limit wage inflation and potential
monetary policy.
Market opinion on unemployment levels, the rate of the economic recovery and ultimately the timing of
fiscal tightening is varied and if anything increasingly diverging with several scenarios possible.
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 April 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
end
30 Apr
2014
One
Month
31 Mar
2014
Three
One
Months Year
31 Jan 30 Apr
2014
2013
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.91%
1.91%
1.83%
0.74%
10 Year
2.86%
2.92%
2.86%
1.85%
20 Year
3.57%
3.62%
3.61%
2.99%
30 Year
3.65%
3.72%
3.71%
3.42%
50 Year
3.49%
3.57%
3.53%
3.31%
1 Month change (RHS, Bps):
5.0%
10
2.5%
0
0
10
20
30
40
50
0.0%
-10
Real rates - Index-linked gilt markets
5 Year
-1.07%
-0.99%
-1.10%
-2.08%
10 Year
-0.32%
-0.24%
-0.25%
-1.27%
20 Year
-0.02%
0.01%
0.04%
-0.47%
30 Year
-0.02%
-0.01%
0.04%
-0.27%
50 Year
-0.09%
-0.07%
-0.01%
-0.25%
5 Year
3.13%
3.11%
3.10%
3.16%
10 Year
3.29%
3.29%
3.27%
3.31%
20 Year
3.59%
3.61%
3.58%
3.59%
30 Year
3.65%
3.67%
3.64%
3.69%
50 Year
3.67%
3.67%
3.64%
3.72%
2.0%
10
0.0%
0
-2.0%
-10
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
10
2.5%
0
0.0%
-10
0
10
20
30
40
50
Nominal gilt curve vs swap curve
5 Year
-0.15%
-0.16%
-0.14%
-0.18%
10 Year
0.04%
0.03%
0.00%
-0.03%
20 Year
0.22%
0.22%
0.23%
0.11%
30 Year
0.25%
0.31%
0.29%
0.26%
50 Year
0.17%
0.25%
0.20%
0.10%
Global bond markets
0.5%
10
0.0%
0
-0.5%
-10
0
10
20
30
50
Forward gilt curves
10 Year Bund
1.47%
1.57%
1.66%
1.22%
10 Yr Gilt / Bund Spread
1.18%
1.15%
1.03%
0.47%
10 Year US Treasury
2.65%
2.72%
2.64%
1.67%
10 Yr Gilt / US Spread
0.02%
0.02%
0.06%
0.02%
5 year IG CDS - Euro
70
76
82
99
5 year IG CDS - US
64
69
72
75
Money markets
5.0%
2.5%
Gilt curve
3 yrs fwd
1 yr fwd
5 yrs fwd
0.0%
0
Currency rates
10
20
30
40
50
30 Apr
2014
31 Mar
2014
31 Jan
2014
30 Apr
2013
1.55
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.69
1.67
1.64
SONIA
0.42%
0.42%
0.43%
0.41%
GBP / EUR
1.22
1.21
1.22
1.18
3m Libor
0.53%
0.52%
0.52%
0.50%
GBP / JPY
172.3
171.9
167.7
151.6
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
3.38%
3.61%
3.70%
3.55%
3.61%
ATM* Implied volatility
62.9
68.1
67.5
61.6
61.6
Source: Schroders, Bloomberg, 30 April 2014. *At the money. All data as at month end allowing for UK trading days.
2
40
Portfolio Solutions Monthly April 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
end
30 Apr
2014
One
Month
31 Mar
2014
Three
One
Months Year
31 Jan 30 Apr
2014
2013
MSCI All World
199
196
186
178
FTSE 100
6,780
6,598
6,510
6,430
S&P 500
1,884
1,872
1,783
1,598
Euro Stoxx 50
3,198
3,162
3,014
2,712
Nikkei 225
14,304
14,828
14,915
13,861
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Apr 13
Jul 13
Oct 13
Jan 14
Apr 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.1%
13.6%
15.4%
14.0%
Skew (110 - 90)
4.0%
4.3%
4.3%
4.5%
ATM implied 1 year volatility
20.0%
Skew (110 vol - 90 vol)
5.0%
15.0%
4.0%
10.0%
Apr 13
Jul 13
Oct 13
Jan 14
Apr 14
3.0%
Apr 13
Jul 13
Oct 13
Jan 14
Apr 14
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.2%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
2.0%
107.9%
3 yr
5.2%
116.7%
123.6%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.1%
104.7%
105.6%
3 yr
6.6%
112.7%
117.7%
NB - one year range indicators for equity risk management strategies are based on month end values for the past 9 months.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 April 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 April 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 May 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS03019
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