Schroder Diversified Growth
Strategy Overview
Summary
Schroder Diversified Growth Strategy seeks to provide a target return of 90 Day T-Bill +
4% per annum net of fees over a full economic cycle (typically 5-7 years). This is consistent
with longer term return of growth assets such as equities. The target volatility is 6-10%,
significantly lower than equity volatility.*
*There is no guarantee that return and volatility objectives can be met.
Team highlights
— The Multi-Asset team consists of over 110 investment professionals managing $116bn
for clients globally
— Research is organized around a risk premia based approach utilizing both quantitative
and qualitative analysis
— The team’s approach is solutions oriented with products based around five key desired
investor outcomes: Wealth Preservation, Risk-Controlled Growth, Income, Inflation
Protection, and Risk Mitigation
Key features
A globally diversified portfolio such as Schroder Diversified Growth seeks to take
advantage of different market scenarios. By combining many different investment classes,
traditional and alternative, we believe it can effectively reduce risk and achieve a return
comparable to that of a global portfolio consisting exclusively of stocks. Portfolios are
constructed around the principles of:
— Investing in a broad mix of growth assets
— A mix of active and passive investments as well as custom beta portfolios
— Active management using dynamic asset allocation
The portfolio’s strategic choice of assets is designed to achieve equity-like returns with lower
volatility by investing in a strategically diversified portfolio of traditional and non-traditional
growth focused assets.
Investment
philosophy
We believe in the benefits of diversification and adopt a multi-asset, risk premia based
approach where we cast a wide net and aim to understand the linkages across asset
classes. Our investment philosophy hinges on the following:
— All assets can be disaggregated into constituent risk premia
— We access these risk premia with an unconstrained growth bias
— Risk premia are not stable over time, therefore, we allocate assets dynamically using
valuation and cyclical analysis
— Diversification is a potential means to an end, not an end in and of itself
— We take a pragmatic approach to risk, combining quantitative risk modelling and
qualitative scenario analysis
— The path of returns matters, not just the outcome
Firm highlights
All data and statistics as of March 31, 2016
unless otherwise noted
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Schroders manages approximately USD $466.9 billion in assets worldwide
Asset management is our sole business
Over 450 portfolio managers and analysts globally
Dedicated to proprietary research – fundamental and quantitative
Truly global reach: 38 offices in 28 countries
Schroder Diversified Growth Strategy
Investment process
— overview
The Diversified Growth strategy seeks the most attractive risk-adjusted opportunities by
investing in a wide range of asset classes to maximize diversification and reduce cross-asset
class correlations. Every position must be expected to enhance returns or reduce risk to
justify its place in the portfolio. We do not seek to add value by trading short-term gyrations
in markets; instead, we use the framework of our active asset allocation process to assess
which asset classes we should be over and underweighting.
“Every position must be expected to enhance returns
or reduce risk to justify its place in the portfolio.”
Asset allocation decisions are grounded by our three stage process, which is illustrated below.
Research & Analysis
Asset Allocation
Portfolio Construction
Strategic Investment Group
Multi-Asset (“SIGMA”)
Global Asset Allocation
Committee (“GAAC”)
Portfolio Managers
and Analysts
 Risk premia research
 Specialist views
 Analysis of valuation,
momentum and
the cycle
 Five independent
Multi-Asset specialists
 Asset class preferences
 Conviction and
accountability
 Set stop-loss/take-profit
 Implementation of SIGMA
and GAAC views
 Fund/vehicle selection
 Position-sizing
 Monitor risk and return
Source: Schroders. Diagram for illustrative purposes only.
Research and
analysis
The team’s research platform is underpinned by its belief in a risk premia approach to
investing. We deem asset class labels as weak descriptors of portfolio risks and can obscure
the underlying common risk factors. In response, we break down asset classes into their
component risk premia, facilitating a better understanding of the exposures of your portfolio.
More than 40 investment professionals, made up of portfolio managers, quantitative
analysts and economists, comprise the Strategic Investment Group Multi-Asset (SIGMA).
There are eight risk premia teams and, collectively, their research is an integral part of
our active investment process.
Each risk premia team is tasked with analyzing the key drivers of risks and returns, across
all asset classes, at the individual risk premium level.
“valuation matters at extremes”
Each risk premia team assigns a score to their risk premium expressing their current view
on its attractiveness. SIGMA meets monthly to allow each risk premium team to formally
present its views which are the result of this continuous research process. All of the teams
carry out this research using a common approach to ensure consistency. The factors we
analyze can be divided into three broad groups. First, we look at valuation where we use
a quantitative approach to summarize the market information. We believe that valuation
matters at extremes and as a consequence, valuation factors will be major drivers of
our decisions when they are at extreme levels. The challenge for multi-asset investors is
that valuation cycles at the asset class level tend to evolve over periods of years and that
extreme valuation opportunities are only evident every few years. The rest of the time we
use cyclical and sentiment-based factors.
Our cyclical analysis is mainly fundamental in nature because, although each economic
cycle might follow a similar pattern, the length of each cycle varies considerably. Cyclical
factors we focus on tend to relate to the interest cycle, industrial cycle and consumption
cycle. Due to the increased importance of fiscal policy, political analysis also forms part of
the cyclical assessment we need to make. In the absence of valuation extremes, our cyclical
analysis is the main driver of our decisions.
Schroder Diversified Growth Strategy
Research and
analysis (continued..)
Finally, we consider sentiment-based factors. Here we combine quantitative measures
of sentiment, which typically focus on momentum, with a more qualitative assessment of
positioning. These sentiment-based factors are necessary but not sufficient in our decision
to establish a particular decision.
Other qualitative factors such as liquidity, politics and volatility are also assessed. Each risk
premium receives a score which reflects its current attractiveness based on the aggregate
impact of the above factors.
The benefit of quantitative analysis (e.g. cyclical, fundamental and sentiment factors,
momentum, etc.) is that it provides an unbiased framework for determining absolute
and relative intrinsic value and fair pricing. Qualitative factors are useful in that they
provide a framework for analyzing potential outcomes for which data does not exist
or is inadequate (e.g. political risk and other tail risk scenarios). Our quantitative analysis
serves as a decision support tool which, when taken with qualitative factors, serves as the
backbone of the discretionary decisions that ultimately drive investment decisions.
Asset allocation
The next stage of the process involves a meeting of our Global Asset Allocation Committee
(GAAC). The GAAC meets on a monthly basis (more often if market conditions dictate)
and comprises five senior Multi-Asset investment professionals. The committee takes into
account the scores and inputs provided by the various risk premia teams, as well as the
output of our Economics and Strategy team’s economic cycle models. Our process is
primarily qualitative, with each member of the GAAC responsible for identifying valuation
and thematic anomalies that can be implemented as tactical asset allocation positions
within portfolios. These trade ideas are typically expressed as pair trades, i.e. where we
believe one asset will outperform another. The pair trade is, therefore, to buy the preferred
asset and to sell the less favored.
We are all aware of the perils of committee-based decision-making: “group-think” and a
lack of both accountability and dynamism. Yet, we believe that five heads are better than
one. We, therefore, seek to address the problems with committee-based decision-making
in the following way: in order for any trade idea to be considered, it must be proposed by
one member, seconded by another, have a strong rationale and have take-profit and stoploss limits. This means that each position has two GAAC members backing it and, crucially,
the performance of each trade forms a part of each proposer’s and seconder’s annual review
and compensation. There is no requirement for unanimity although each trade is the focus
of intense debate.
Risk management
Our objective is to ensure that the portfolio has a diversified range of exposures to the
various asset classes. In addition to ensuring that the portfolio is invested across numerous
positions, we make use of sophisticated risk analysis to assess and quantify different types of
risks to which the strategy is exposed. Schroder Multi-Asset Risk Technology (SMART) is our
proprietary risk management system:
1. A portfolio construction tool: It provides portfolio managers with the means to design
portfolio strategies with particular return and risk characteristics against a variety of
benchmarks. One of the key benefits of SMART is its flexibility.
2. SMARTVaR: Any portfolio created within SMART can be analyzed in SMARTVaR which
provides VaR reporting at different confi dence levels (90% - 99.5%) over different time
horizons and performs CVaR – based risk budgeting. Asset class assumptions can
be stress-tested within SMARTVaR by stressing, for example, the correlation matrix.
Portfolios can be modified to analyze the effect of changing the portfolio structure.
3. SMART Trader: Enables us to assess factor risks in portfolios such as equity, fixed
income, small cap, commodities, credit and currencies. Although the strategy has a
high degree of flexibility, diversification is paramount in managing overall risk. We have
therefore set ranges on the net exposure to each asset class to ensure the portfolio is
broadly diversified at all times and that no one asset class contributes excessively to total
portfolio risk.
Schroder Diversified Growth Strategy
Asset allocation —
ranges and
positioning
— Developed equities remain our favored asset class
— Low exposure to emerging market risk; minimal exposure to commodities (only gold),
absolute return-oriented approach to EMD, no top-down exposure to emerging equities
— Duration is an attractive hedge for now given lack of inflation
Model portfolio
Stand-alone weighted risk
Composite
5.5%
Risk reducing
2.5%
Return seeking
7.3%
Risk Weight
(%)
10
8
6
4
2
Risk Premia
SIGMA
Diversification Effect
Total Portfolio Risk
Diversification Effect
Long CHF vs GBP
Long USD vs MYR
Long EUR vs GBP
Long USD vs TWD
Long JPY vs USD
Long JPY vs KRW
Diversifying FX Basket
US Inflation-linked Bonds
Diversifying Bond Basket
Long US 10 yr vs German 10 yr
Long RUB vs USD
Long MXN vs USD
Long INR vs USD
GAAC
Long AUD vs NZD
Emerging Market Debt (Local)
REITs
Investment Grade
Long Gold
Stable Energy Basket
Diversified Trend Strategy
Japan Equities
Japan Corp. Ref. Basket
UK Equities
Europe Equities
Global Equities
US Large Cap Equities
0
Total Portfolio Risk
Source: Schroders, as of March 31, 2016. The data shown is a representative portfolio for Diversified Growth (US).
Sectors and securities are mentioned for illustrative purposes only and should not be viewed as a recommendation to
buy/sell. Portfolio holdings can change at any time.
Risks
All investments, domestic and foreign, involve risks including the risk of possible loss of
principal. The market value of a portfolio may decline as a result of a number of factors,
including adverse economic and market conditions, prospects of stocks in the portfolio,
changing interest rates, and real or perceived adverse competitive industry conditions.
Investing overseas involves special risks including among others, risks related to political
or economic instability, foreign currency (such as exchange, valuation, and fluctuation) risk,
market entry or exit restrictions, illiquidity and taxation, interest rate risk, credit risk, inflation/
deflation risk, currency risk, mortgage and asset-backed securities risk, U.S. Government
securities risk, foreign investment risk and derivatives risk. Emerging markets pose
greater risks than investments in developed markets. Investments in small- and mediumcapitalization companies may involve a higher degree of risk and volatility than investments
in larger, more established companies. No investment strategy or risk management
technique can guarantee returns or eliminate risk in any market environment. The use of
derivatives involves risks different from, or possibly greater than, the risks associated with
investing directly in the underlying assets.
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 over 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-DIVGRO