Portfolio Solutions Monthly March 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
March 2014
Markets Dashboard
Yield changes (bps): February 2014 to March 2014
10 year
20 year
50 year
Risk asset market changes:
February 2014 to March 2014
FI Gilt yield
+4
+0
 +2
MSCI All World

+1.3%
IL Gilt yield
-5
-6
 -7
FTSE 100

-3.1%
RPI swap
+4
+4
 +6
5yr Euro CDS

+5 bps
FI Gilt / Swap spread
+2
+2
 +3
1 year 90% FTSE 100 put

-
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse,
31 March 2014. Change in put is the outright change in
premium.
Source: Schroders, 31 March 2014.
Funding level dashboard
1 year reference funding level progression
1 month attribution of funding level change
122%
130%
120%
121%
110%
120%
100%
90%
Mar 13
Jun 13
Sep 13
Dec 13
Mar 14
Feb
funding
level:
121%
Nominal
rates:
+0.1%
Real
rates:
-0.8%
Growth
assets:
+0.4%
Mar
funding
level:
121%
Source: Schroders, Bloomberg, 31 March 2014. Please refer to the supporting notes section on page 4.
Budget and gilt issuance calendar commentary
Below we set out our thoughts on the key LDI developments from the 2014 Budget:
— Overall Gilt issuance expected for 2014-2015 is predicted to be £128.4 billion. This was lower than many
observers had predicted and would represent the lowest level of gross issuance since 2007-08.
— Index-linked gilt supply for the year will be c£31 billion, down from c£37 billion for 2013-14. This somewhat
limited supply in the face of continuing LDI demand could pose a headwind for real yields in the short-term.
— The budget also contained a radical overhaul of retirement options for DC members, removing the
requirement for the purchase of annuities. Whilst this could reduce demand for annuities and therefore
long dated gilts it is far from certain that this reduced demand will represent a significant upward pressure
on long dated gilt yields. Given the first wave of an aging DC population, continued DB pension scheme
demand and the expected innovation in retirement products it is far from certain that demand will reduce
and contribute to a significant upward pressure on long dated gilt yields.
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 March 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
end
31 Mar
2014
One
Three
One
Month Months Year
28 Feb 31 Dec 31 Mar
2014
2013
2013
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.91%
1.84%
2.07%
0.75%
10 Year
2.92%
2.89%
3.20%
1.94%
20 Year
3.62%
3.62%
3.78%
3.13%
30 Year
3.72%
3.72%
3.85%
3.54%
50 Year
3.57%
3.54%
3.65%
3.45%
1 Month change (RHS, Bps):
5.0%
40
2.5%
0
0
10
20
30
40
50
0.0%
-40
Real rates - Index-linked gilt markets
5 Year
-0.99%
-0.99%
-0.96%
-2.27%
10 Year
-0.24%
-0.20%
-0.07%
-1.38%
20 Year
0.01%
0.07%
0.11%
-0.44%
30 Year
-0.01%
0.05%
0.10%
-0.19%
50 Year
-0.07%
0.00%
0.02%
-0.16%
5 Year
3.11%
3.03%
3.16%
3.40%
10 Year
3.29%
3.25%
3.37%
3.53%
20 Year
3.61%
3.57%
3.70%
3.68%
30 Year
3.67%
3.64%
3.74%
3.73%
50 Year
3.67%
3.62%
3.73%
3.76%
2.0%
10
0.0%
0
-2.0%
-10
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
15
2.5%
0
0.0%
-15
0
10
20
30
40
50
Nominal gilt curve vs swap curve
5 Year
-0.16%
-0.14%
-0.10%
-0.22%
10 Year
0.03%
0.01%
0.10%
-0.02%
20 Year
0.22%
0.20%
0.21%
0.17%
30 Year
0.31%
0.30%
0.30%
0.28%
50 Year
0.25%
0.22%
0.24%
0.14%
Global bond markets
0.5%
10
0.0%
0
-0.5%
-10
0
10
20
30
50
Forward gilt curves
10 Year Bund
1.57%
1.62%
1.93%
1.29%
10 Yr Gilt / Bund Spread
1.15%
1.08%
1.07%
0.47%
10 Year US Treasury
2.72%
2.65%
3.03%
1.85%
10 Yr Gilt / US Spread
0.02%
0.07%
-0.01%
-0.08%
5 year IG CDS - Euro
76
71
70
126
5 year IG CDS - US
69
64
62
91
Money markets
5.0%
2.5%
Gilt curve
3 yrs fwd
1 yr fwd
5 yrs fwd
0.0%
0
Currency rates
10
20
31 Mar
2014
30
40
50
28 Feb 31 Dec 31 Mar
2014
2013
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.67
1.67
1.66
SONIA
0.42%
0.42%
0.43%
0.41%
GBP / EUR
1.21
1.21
1.20
1.18
3m Libor
0.52%
0.52%
0.53%
0.51%
GBP / JPY
171.9
170.4
174.4
142.9
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
3.42%
3.66%
3.75%
3.58%
3.63%
ATM* Implied volatility
65.5
69.7
67.6
61.8
61.8
Source: Schroders, Bloomberg, 31 March 2014. *At the money. All data as at month end allowing for UK trading days.
2
40
1.52
Portfolio Solutions Monthly March 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
end
31 Mar
2014
One
Three
One
Month Months Year
28 Feb 31 Dec 31 Mar
2014
2013
2013
Equity indices
MSCI All World
196
194
194
172
FTSE 100
6,598
6,810
6,749
6,412
S&P 500
1,872
1,859
1,848
1,569
Euro Stoxx 50
3,162
3,149
3,109
2,624
Nikkei 225
14,828
14,841
16,291
12,336
MSCI All World Total Return (re-based to 100)
120
100
80
Mar 13
Jun 13
Sep 13
Dec 13
Mar 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.6%
13.6%
14.0%
14.0%
Skew (110 - 90)
4.3%
4.1%
3.9%
4.6%
ATM implied 1 year volatility
20.0%
Skew (110 vol - 90 vol)
5.0%
15.0%
4.0%
10.0%
Mar 13
Jun 13
Sep 13
Dec 13
Mar 14
3.0%
Mar 13
Jun 13
Sep 13
Dec 13
Mar 14
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.3%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
2.2%
107.9%
3 yr
5.5%
116.5%
123.8%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.3%
104.7%
105.6%
3 yr
7.0%
112.5%
117.9%
NB - one year range indicators for equity risk management strategies are based on month end values for the past 8 months.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 March 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.
3
Portfolio Solutions Monthly March 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 April 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS02896
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