Download September 2014

Portfolio Solutions Monthly September 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
September 2014
Markets Dashboard
Yield changes (bps): Aug 2014 to Sep 2014
FI Gilt yield
10 year
+7

20 year
+10

50 year
+12

IL Gilt yield

+16

+7

+3
RPI swap

-1

+5

+6
FI Gilt / Swap spread 
-1

+1

+3
Source: Schroders, 30 September 2014.
Risk asset market changes:
Aug 2014 to Sep 2014
-3.7%
FTSE 100


5yr Euro CDS

+3 bps
1 year 90% FTSE 100 put

+0.4%
MSCI All World
-2.9%
Source: Schroders, Bloomberg, Merrill Lynch, Credit
Suisse, 30 September 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
104%
120%
102%
110%
100%
100%
90%
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Aug
Nominal Real
funding rates:
rates:
level:
+0.9% +0.6%
102%
Growth
Sep
assets: funding
-2.5%
level:
101%
Source: Schroders, Bloomberg, 30 September 2014. Please refer to the supporting notes for further details.
September commentary
Recent market conditions have prompted schemes and their advisors to consider inflation-only hedging. This
has been driven by outright inflation levels looking less “expensive” compared to real or nominal yields based
on historic levels. Below we set out the key areas to be considered before implementing an inflation-only
hedge:
 An inflation-only hedge has the impact of converting liability exposure to real yields to an exposure to
nominal yields which, historically, have been more volatile.
 As a result, the impact on the scheme’s overall balance sheet and risk should be carefully considered.
 However, an inflation-only hedge with a deferred interest rate hedge offers the potential opportunity to
achieve real rate coverage at a more attractive combined level. However, doing so changes the nature of
the overall risk exposure, which may not result in risk reduction.
 Whilst it is true that outright long dated inflation levels historically look “less expensive”, allowing for
outright nominal yield and short dated inflation levels, this “cheapness” is less obvious.
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 September 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
30 Sep 31 Aug 30 Jun 30 Sep
2014
2014
2014
2013
Month end curve
Nominal rates - Gilt markets
5 Year
1.80%
1.73%
2.05%
1.60%
10 Year
2.51%
2.44%
2.87%
2.84%
20 Year
3.12%
3.02%
3.52%
3.60%
30 Year
3.24%
3.12%
3.62%
3.78%
50 Year
3.12%
3.00%
3.44%
3.63%
1 Month change (RHS, Bps):
5.0%
20
2.5%
0
0
10
20
30
40
50
0.0%
-20
Real rates - Index-linked gilt markets
5 Year
-0.97%
-1.14%
-0.91%
-1.30%
10 Year
-0.48%
-0.64%
-0.29%
-0.31%
20 Year
-0.32%
-0.38%
-0.06%
0.04%
30 Year
-0.32%
-0.35%
-0.04%
0.04%
50 Year
-0.33%
-0.36%
-0.10%
0.00%
5 Year
3.01%
3.03%
3.10%
3.16%
10 Year
3.19%
3.20%
3.28%
3.31%
20 Year
3.49%
3.44%
3.58%
3.65%
30 Year
3.55%
3.49%
3.64%
3.72%
50 Year
3.53%
3.48%
3.65%
3.71%
5 Year
-0.21%
-0.20%
-0.15%
-0.15%
10 Year
-0.03%
-0.02%
0.01%
0.06%
20 Year
0.19%
0.17%
0.19%
0.18%
30 Year
0.28%
0.27%
0.25%
0.29%
50 Year
0.21%
0.18%
0.15%
0.23%
10 Year Bund
0.95%
0.89%
1.25%
1.78%
10 Yr Gilt / Bund Spread
1.46%
1.46%
1.41%
0.93%
10 Year US Treasury
2.49%
2.34%
2.53%
2.61%
10 Yr Gilt / US Spread
-0.06%
0.02%
0.14%
0.11%
5 year IG CDS - Euro
63
60
62
104
5 year IG CDS - US
64
57
59
82
2.0%
20
0.0%
0
-2.0%
-20
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
10
2.5%
0
0.0%
-10
0
10
20
30
40
50
Nominal gilt curve vs swap curve
Global bond markets
0.5%
5
0.0%
0
-0.5%
-5
0
10
20
30
40
50
Forward gilt curves
5.0%
2.5%
Gilt curve
3 yrs fwd
0.0%
0
Currency rates
Money markets
1 yr fwd
5 yrs fwd
10
20
30
40
50
30 Sep 31 Aug 30 Jun 30 Sep
2014
2014
2014
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.62
1.66
1.71
SONIA
0.45%
0.45%
0.45%
0.42%
GBP / EUR
1.28
1.26
1.25
1.20
3m Libor
0.57%
0.56%
0.55%
0.52%
GBP / JPY
177.8
172.8
173.3
159.0
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
2.97%
3.12%
3.18%
3.08%
3.12%
ATM* Implied volatility
63.8
66.8
65.6
60.1
60.1
Source: Schroders, Bloomberg, 30 September 2014. *At the money. All data as at month end allowing for UK trading days.
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1.62
Portfolio Solutions Monthly September 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H•
Month
One
Three
One
end
Month Months Year
30 Sep 31 Aug 30 Jun 30 Sep
2014
2014
2014
2013
Equity indices
MSCI All World
197
205
204
182
FTSE 100
6,623
6,820
6,744
6,462
S&P 500
1,972
2,003
1,960
1,682
Euro Stoxx 50
3,226
3,173
3,228
2,893
Nikkei 225
16,174
15,425
15,162
14,456
13.0%
15.6%
4.3%
4.0%
MSCI All World Total Return (re-based to 100)
120
100
80
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
13.8%
13.2%
Skew (110 - 90)
4.8%
4.5%
ATM implied 1 year volatility
20.0%
15.0%
Skew (110 vol - 90 vol)
5.0%
4.0%
10.0%
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
3.0%
Sep 13
Dec 13
Mar 14
Jun 14
Sep 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
3.1%
107.2%
3 yr
6.1%
117.1%
128.7%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
4.3%
104.5%
106.3%
3 yr
9.2%
110.9%
119.3%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 September 2014. *At the money. All data as at month end allowing for UK
trading days.
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.
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Portfolio Solutions Monthly September 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 October 2014 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V
7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.
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