Portfolio Solutions Monthly February 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
February 2014
Markets Dashboard
Yield changes (bps): Jan 14 to Feb 14
10 year
20 year
50 year
Risk asset market changes:
Jan 14 to Feb 14
FI Gilt yield
+3
+1
 +2
MSCI All World
 +4.1%
IL Gilt yield
+5
+3
 +1
FTSE 100
 +4.6%
RPI swap
-1
-2
 -2
5yr Euro CDS
 -11 bps
FI Gilt / Swap spread
+1
-3
 +1
1 year 90% FTSE 100 put

Source: Schroders, 28 February 2014.
-0.5%
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse,
28 February 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
130%
119%
120%
117%
110%
115%
100%
113%
90%
Feb 13
May 13
Aug 13
Nov 13
Jan
funding
level:
114%
Feb 14
Nominal
rates:
+0.1%
Real
rates:
+0.2%
Growth
assets:
+4.2%
Feb
funding
level:
118%
Source: Schroders, Bloomberg, 28 February 2014. Please refer to the supporting notes for further details.
February Events
Investment Opportunities





January CPI printed at 1.9%, below the Bank of
England 2.0% target for the first time since
November 2009.
The Monetary Policy Committee abandoned its
forward guidance linking monetary policy to
unemployment.
c£1.9bn 3 3/4% 2052 Outright Auction
c£10bn of issuance across fixed interest and
index linked gilts between 5-10 year maturities


Long dated inflation rates remain at close to 12
month lows potentially offering attractive levels
for implementing inflation hedging strategies.
Long-dated real yields have been fairly stable
over recent months. Investors monitoring real
yield levels to increase coverage may benefit
from reassessing their trigger levels.
Equity implied volatility has continued to trend
downwards hitting close to 12 month lows. This
may present opportunities to those seeking to
purchase protection.
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 February 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
One
end
Month
28 Feb 31 Jan
2014
2014
Three
One
Months Year
30 Nov 28 Feb
2013
2013
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.84%
1.83%
1.68%
0.92%
10 Year
2.89%
2.86%
2.92%
2.13%
20 Year
3.62%
3.61%
3.71%
3.30%
30 Year
3.72%
3.71%
3.82%
3.71%
50 Year
3.54%
3.53%
3.64%
3.62%
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%
-1.10%
-1.20%
-2.10%
10 Year
-0.20%
-0.25%
-0.29%
-1.10%
20 Year
0.07%
0.04%
0.02%
-0.21%
30 Year
0.05%
0.04%
0.02%
0.00%
50 Year
0.00%
-0.01%
-0.06%
0.01%
5 Year
3.03%
3.10%
3.07%
3.29%
10 Year
3.25%
3.27%
3.32%
3.36%
20 Year
3.57%
3.58%
3.68%
3.62%
30 Year
3.64%
3.64%
3.74%
3.71%
50 Year
3.62%
3.64%
3.73%
3.76%
5 Year
-0.14%
-0.14%
-0.10%
-0.14%
10 Year
0.01%
0.00%
0.08%
0.03%
20 Year
0.20%
0.23%
0.26%
0.19%
30 Year
0.30%
0.29%
0.33%
0.29%
50 Year
0.22%
0.20%
0.29%
0.13%
2.0%
25
0.0%
0
-2.0%
-25
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
Global bond markets
15
0.0%
0
-0.5%
-15
0
10
20
30
40
50
Forward gilt curves
10 Year Bund
1.62%
1.66%
1.69%
1.45%
10 Yr Gilt / Bund Spread
1.08%
1.03%
1.06%
0.51%
10 Year US Treasury
2.65%
2.64%
2.74%
1.88%
10 Yr Gilt / US Spread
0.07%
0.06%
0.02%
0.10%
5 year IG CDS - Euro
71
82
79
117
5 year IG CDS - US
64
72
70
88
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
28 Feb 31 Jan 30 Nov 28 Feb
2014
2014
2013
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
SONIA
0.42%
0.43%
0.42%
0.40%
GBP / EUR
1.21
1.22
1.20
1.16
3m Libor
0.52%
0.52%
0.52%
0.51%
GBP / JPY
170.4
167.7
167.7
140.3
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
1.67
1.64
1.64
ATM* Forward
Par swap rate
3.44%
3.69%
3.80%
3.61%
3.67%
ATM* Implied volatility
64.6
68.9
66.6
60.7
60.7
Source: Schroders, Bloomberg, 28 February 2014. *At the money
2
0.5%
1.52
Portfolio Solutions Monthly February 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
end
28 Feb
2014
One
Month
31 Jan
2014
Three
One
Months Year
30 Nov 28 Feb
2013
2013
MSCI All World
194
186
191
170
FTSE 100
6,810
6,510
6,651
6,361
S&P 500
1,859
1,783
1,806
1,515
Euro Stoxx 50
3,149
3,014
3,087
2,634
Nikkei 225
14,841
14,915
15,662
11,559
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Feb 13
May 13
Aug 13
Nov 13
Feb 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.6%
15.4%
14.8%
14.3%
Skew (110 - 90)
4.1%
4.3%
3.9%
4.3%
ATM implied 1 year volatility
20.0%
Skew (110 vol - 90 vol)
5.0%
15.0%
4.0%
10.0%
Feb 13
May 13
Aug 13
Nov 13
Feb 14
3.0%
Feb 13
May 13
Aug 13
Nov 13
Feb 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
5.7%
115.8%
123.3%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.4%
104.7%
105.7%
3 yr
7.2%
111.8%
117.5%
NB - one year range indicators for equity risk management strategies are based on month end values for the past 7 months.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 28 February 2014. *At the money
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 February 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 March 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS02801
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