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 PortfolioSolutions@schroders.com 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. 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