Schroders Portfolio Solutions Monthly

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Portfolio Solutions Monthly January 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
January 2014
Markets Dashboard
Yield changes (bps): Dec 13 to Jan 14
10 year
20 year
Risk asset market changes:
Dec 13 to Jan 14
50 year
FI Gilt yield
-34
-17
 -12
MSCI All World

-4.1%
IL Gilt yield
-18
 -7
 -3
FTSE 100

-3.5%
RPI swap
-10
-12
 -9
5yr Euro CDS

12 bps
FI Gilt / Swap spread
 -9
 +2
 -4
1 year 90% FTSE 100 put

0.5%
Source: Schroders, 31 January 2014.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse,
31 January 2014.
Funding level dashboard
1 year reference funding level progression
122%
120%
118%
116%
114%
112%
130%
120%
110%
100%
90%
Jan 13
1 month attribution of funding level change
Apr 13
Jul 13
Oct 13
Dec
Nominal
funding
rates:
level:
-1.7%
120%
Jan 14
Real
rates:
-0.9%
Growth
assets:
-3.5%
Jan
funding
level:
114%
Source: Schroders, Bloomberg, 31 January 2014. Please refer to the supporting notes for further details.
January events
Investment opportunities

UK unemployment dropped to 7.1%. This was
below the 7.3% median forecast of economists.


The UK GDP print for Q4 2013 was 0.7%. This
was in line with predictions.
Inflation expectations fell across the curve over the
month getting close to 12 month lows, particularly at
the long end. This could offer good value for
Schemes looking to implement inflation hedging
solutions.




c£3.6bn 2.25% 2023 outright auction
c£2.2bn 3.25% 2044 outright auction
c£1.5bn 0.125% IL 2029 outright auction
c£4.75bn 0.125% IL 2068 syndicated offering

Whilst yields fell over the month, long dated yields
are still towards 12 month highs. With forward curves
already pricing a 0.5% increase in 20 year rates over
the next 5 years, buying outright nominal and/or real
protection could be attractive.
Contact us
The Schroders Portfolio Solutions team partners with investors to provide risk management strategies across all
major financial markets.
Please contact us at [email protected] if you would like further information on how Schroders
can help manage your Scheme’s exposure to risk.
Portfolio Solutions Monthly January 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
31 Jan 31 Dec 31 Oct 31 Jan
2014
2013
2013
2013
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.83%
2.07%
1.55%
1.10%
10 Year
2.86%
3.20%
2.75%
2.23%
20 Year
3.61%
3.78%
3.55%
3.35%
30 Year
3.71%
3.85%
3.74%
3.75%
50 Year
3.53%
3.65%
3.55%
3.64%
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
-1.10%
-0.96%
-1.40%
-1.89%
10 Year
-0.25%
-0.07%
-0.45%
-0.97%
20 Year
0.04%
0.11%
-0.04%
-0.23%
30 Year
0.04%
0.10%
0.00%
-0.10%
50 Year
-0.01%
0.02%
-0.05%
-0.09%
5 Year
3.10%
3.16%
3.19%
3.28%
10 Year
3.27%
3.37%
3.34%
3.39%
20 Year
3.58%
3.70%
3.65%
3.66%
30 Year
3.64%
3.74%
3.72%
3.77%
50 Year
3.64%
3.73%
3.71%
3.85%
5 Year
-0.14%
-0.10%
-0.14%
-0.10%
10 Year
0.00%
0.10%
0.03%
0.06%
20 Year
0.23%
0.21%
0.18%
0.19%
30 Year
0.29%
0.30%
0.29%
0.31%
50 Year
0.20%
0.24%
0.20%
0.12%
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
1.66%
1.93%
1.67%
1.68%
10 Yr Gilt / Bund Spread
1.03%
1.07%
0.93%
0.41%
10 Year US Treasury
2.64%
3.03%
2.55%
1.98%
10 Yr Gilt / US Spread
0.06%
-0.01%
0.06%
0.11%
5 year IG CDS - Euro
82
70
83
112
5 year IG CDS - US
72
62
73
89
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
31 Jan 31 Dec 31 Oct
2014
2013
2013
1.64
1.66
1.61
50
31 Jan
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
SONIA
0.43%
0.43%
0.42%
0.41%
GBP / EUR
1.22
1.20
1.18
1.17
3m Libor
0.52%
0.53%
0.51%
0.51%
GBP / JPY
167.7
174.4
157.8
145.0
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
3.41%
3.67%
3.77%
3.60%
3.66%
ATM* Implied volatility
63.6
67.6
65.3
59.8
59.8
Source: Schroders, Bloomberg, 31 January 2014. *At the money
2
0.5%
1.59
Portfolio Solutions Monthly January 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
31 Jan 31 Dec 31 Oct 31 Jan
2014
2013
2013
2013
Equity indices
MSCI All World
186
194
190
171
FTSE 100
6,510
6,749
6,731
6,277
S&P 500
1,783
1,848
1,757
1,498
Euro Stoxx 50
3,014
3,109
3,068
2,703
Nikkei 225
14,915
16,291
14,328
11,139
MSCI All World Total Return (re-based to 100)
120
100
80
Jan 13
May 13
Jul 13
Oct 13
Jan 14
Equity option market indicators (FTSE 100)
ATM* Forward volatility
15.4%
14.3%
15.0%
14.2%
Skew (110 - 90)
4.3%
3.9%
3.7%
4.3%
ATMF Volatility
20.0%
Skew (110 - 90)
5.0%
15.0%
4.0%
10.0%
Jan 13
May 13
Jul 13
Oct 13
Jan 14
3.0%
Jan 13
May 13
Jul 13
Oct 13
Jan 14
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
110.1%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
2.7%
108.1%
3 yr
6.4%
116.1%
124.9%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
4.0%
104.8%
106.2%
3 yr
7.9%
112.0%
118.7%
NB - one year range indicators for equity risk management strategies are based on month end values for the past 6 months.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 January 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
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 January 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 February 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS02732
4
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