Schroder Value Long Duration Strategy
Strategy Overview
Summary
Schroder Value Long Duration Strategy uses a value-driven approach and seeks to generate
return by investing in a portfolio of investment grade, fixed income securities. Long bonds
for long liabilities—investing to correspond with liabilities—has been a powerful theme of
Schroder Value for decades. The strategy is duration neutral, meaning that portfolio duration
is set in an attempt to meet client objectives and does not incorporate forecasts
or speculation.
The strategy seeks to add value by capitalizing on imbalances in the relationships among
sectors and individual bonds. We believe that investing in undervalued sectors and bonds
and selling expensive ones using a relative value assessment is the ideal process to capture
value over the long term.
The strategy typically invests in US dollar-denominated fixed income including governments,
corporate bonds, sovereign and supranational entities, as well as municipal bonds.
There is no exposure to currency risk, high yield bonds or emerging market debt.
Why Schroder Value
for Long Duration
Strategy?
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Firm highlights
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Team highlights
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Key features
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All data and statistics as of March 31, 2016
Consistent and proven long duration value investment process, practiced for more
than 30 years
Value-driven style that seeks to capitalize on changing market environments
Globally integrated platform — Team of seven experienced investment professionals within
a global team structure of over 50 portfolio managers and more than 30 credit analysts
Multiple sources of input to investment ideas, including proprietary credit research framework
Successful performance track record over full market cycles
Schroders manages $466.9 billion in assets worldwide and $125.6 billion in global
fixed income
Wide range of fixed income strategies across developed and emerging markets
Deep global research capabilities — the vast majority of research is conducted in-house
Team manages $17.2 billion of US Multi-Sector fixed income assets, of which
approximately $4.3 billion is in Value Long Duration strategies
Disciplined approach to long duration strategy since 1980
Seven member portfolio management team has over 20 average years of experience
Investments are team managed, and portfolio management and credit research are an
integrated function
Access to team of global credit analysts utilizing a rigorous research process that combines
fundamental and relative value assessment
Value-driven, opportunity based investment process
Portfolio of investment grade bonds only, with no interest rate forecasting or
currency speculations
Investments are chosen based on relative value without reference to qualitative content
of the benchmark
Sector allocation and security selection are the main sources of generating return
Daily interaction among key decision makers to evaluate opportunities and relative value
Schroder Value Long Duration Strategy
Investment objective
The strategy seeks to outperform the benchmark by 100 basis points over a market cycle
using our value-driven approach and investing in investment-grade fixed income securities.*
* There is no guarantee that any investor objective or outcome can be achieved.
Investment
philosophy
Major imbalances exist in the relationships between individual bonds or sectors, and are
caused by the ebb and flow of supply and demand, as well as sentiment and positioning.
These are far more powerful factors in driving valuations than changes in fundamentals
of investment-grade bonds. We believe these market anomalies can be exploited to
generate returns.
We believe that undervalued bonds will outperform overvalued bonds and our strategy is
focused on purchasing bonds that we believe are undervalued. When, in our view, bonds
become fully priced, we seek to exchange them for better valued issues.
Investment process
In the Schroder Value investment process, portfolio management and research are an
integrated function performed by the portfolio management team. Portfolio managers also
have access to a team of credit analysts, who follow a rigorous research framework that
combines fundamental research and relative value assessment. Investment decisions are
collaborative, and are not made using a separate committee structure or by a portfolio
manager in isolation.
Our investment process is based on three components:
— Sector and security inputs
— Credit research
— Portfolio construction
Sector and security inputs
Relative value analysis is used to position and concentrate portfolios in what we view as
the most undervalued securities within the most undervalued sectors. We analyze historical
spread relationships among sectors and securities, and also look at dynamics of supply
and demand, and sentiment and positioning driving valuations.
Broad sector and industry research determines whether an area of the market is under
pressure for valid reasons or is truly under or over priced relative to fundamentals. The
portfolio manager’s direct interaction with the market is key in judging the supply, demand
and/or other technical and temporary factors that drive price anomalies in the market.
Schroder Value’s process does not manage overweight/underweight positions relative to
the benchmark. A security’s inclusion or exclusion from the index has no effect on our
decision process or willingness to invest in a bond or sector.
Credit research
Securities within the investment-grade universe that meet individual valuation considerations
and fit the desired portfolio structure requirements receive special scrutiny by portfolio
managers performing fundamental research analysis.
Portfolio managers are also supported by our global team of more than 30 fundamental
credit analysts, dedicated to fixed income corporate and municipal credit research.
Analysts perform detailed credit, issuer and industry research on more than 1,300 debt
issuers worldwide.
Schroder Value Long Duration Strategy
Investment process
(continued...)
Portfolio construction
There are two concurrent processes within portfolio construction: 1) individual issuer
preference, which brings together sector and security inputs and credit research to select
bonds and 2) portfolio design, which builds portfolios to have the appropriate attributes in
line with our views.
I. Individual issuer preference
— Review general level of yield spreads and technical market factors
— Review spreads of individual bonds relative to Treasuries, swaps and to one another
— Eliminate from immediate consideration bonds that we view as expensive or of
apparently ordinary value
— Apply credit research to each issuer and issue that meets initial criteria to be
considered undervalued
— Develop an informal hierarchy among bonds that we view as undervalued enough to
include in the portfolios
II. Portfolio construction and design
Determine desired portfolio characteristics from a fundamental investment point of view.
Characteristics include:
— Guideline compliance
— Interest rate duration and spread duration relative to the benchmark
— Sector exposures
— Yield curve positioning
— Yield
Portfolios are tested for variations from policy and guidelines, and if portfolios are outside
of targets, the team decides to either adjust targets or adjust portfolio positioning.
These two simultaneous processes are equally important and mutually dependent.
Risk management
Risk controls are used to ensure portfolios are invested appropriately for each client and are
consistent with the strategy and style discipline. The portfolio management team reviews
portfolio holdings and risk characteristics on a daily basis. Schroder Value also integrates
and augments third-party systems with internally developed applications to measure
and describe portfolio risk exposures. These reports cover investment risk and portfolio
compliance controls and include (i) a comparison of the critical risk metrics of each client
portfolio to the appropriate model portfolio, (ii) a comparison of portfolio risk characteristics
to the benchmark and other portfolios that follow the same strategy and (iii) exceptions
related to client investment guidelines and Schroder Value’s internal investment parameters.
The portfolio management team establishes a model portfolio for all portfolios with similar
benchmarks and investment objectives. Each model portfolio represents the team’s view
of the ideal investment policies and risk characteristics for the applicable strategy that
we seek to replicate across similarly managed portfolios. The team meets regularly to
review the individual portfolios and to evaluate both the portfolio review process and the
model portfolios.
At the firm level, the COO of Investments and the Head of Investment Risk have overall
responsibility for group-wide investment risk. There is a dedicated fixed income risk
manager, and Schroders’ compliance department oversees operational and compliance
issues. In this way, an independent Fixed Income Risk Management team operates
independently of both the portfolio managers and credit analysts.
Risks
All investments involve risks including the risk of possible loss of principal. The market
value of the portfolio may decline as a result of a number of factors, including interest rate
risk, credit risk, inflation/deflation risk, mortgage and asset-backed securities risk, U.S.
Government securities risk, foreign investment risk and liquidity risk. Frequent trading of the
portfolio may result in relatively high transaction costs and may result in taxable capital gains.
Schroder Value Long Duration Strategy
Important information: Schroders is a global asset management company with $466.9 billion under management as of March 31, 2016. Our clients are major financial institutions
including banks and insurance companies, public and private pension funds, endowments and foundations, high net worth individuals, financial intermediaries and retail investors.
Our aim is to apply our specialist asset management skills in serving the needs of our clients worldwide and in delivering value to our shareholders. With one of the largest networks of
offices of any dedicated asset management company and 450 portfolio managers and analysts covering the world’s investment markets, we offer our clients a comprehensive range
of products and services. Further information about Schroders can be found at www.schroders.com/us. This document is designed to describe an investment strategy generally
and does not constitute an offer to sell any investment vehicle, security or instrument. The information and opinions contained in this document have been obtained from sources we
consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document
when taking individual investment and/or strategic decisions. Schroders has expressed its own views and opinions in this document and these may change. Countries mentioned are
shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Diversification does not assure a profit or protect against loss in a declining market.
Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. No managed account can guarantee that it will
achieve its return objective. Portfolio characteristics, such as stock weighting, may vary among accounts managed within the same strategy. Schroder Investment Management North
America Inc. is an indirect wholly owned subsidiary of Schroders plc and is a SEC registered investment adviser and registered in Canada in the capacity of Portfolio Manager with
the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and Saskatchewan providing asset management products and services to clients
in Canada. This document does not purport to provide investment advice and the information contained in this newsletter is for informational purposes and not to engage in a trading
activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the
prospective purchaser to make an investment decision in respect of securities being sold in a distribution. Schroder Investment Management North America Inc. (“SIMNA Inc.”) is an
investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware),
Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the “Schroder Funds”.) Shares of the Schroder Funds are distributed by
Schroder Fund Advisors LLC, a member of FINRA. SIMNA Inc. and Schroder Fund Advisors LLC are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with
shares listed on the London Stock Exchange. Schroder Investment Management North America Inc. 875 Third Avenue, New York, NY 10022-6225, (212) 641-3800, www.schroders.
com/us.
4P-LONG