Download May 2014

Portfolio Solutions Monthly May 2014
For professional investors only
Schroders
Portfolio Solutions Monthly
May 2014
Markets Dashboard
Yield changes (bps): Apr 14 to May 14
10 year
20 year
50 year
Risk asset market changes:
Apr 14 to May 14
FI Gilt yield

-11

-9

-7
MSCI All World

+1.1%
IL Gilt yield

-6

-8

-6
FTSE 100

+1.0%
RPI swap

-7

-3

-3
5yr Euro CDS

-4 bps
FI Gilt / Swap spread

-1

-1

-1
1 year 90% FTSE 100 put

-
Source: Schroders, 31 May 2014.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31
May 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
Source: Schroders, Bloomberg, 31 May 2014. Please refer to the supporting notes for further details.
May commentary




The recently released gilt issuance calendar revealed a lower than expected future issuance of gilts. This
reduced supply contributed to lower yields, however, the impact was reduced for real yields as the inflation print
came in below expectations.
Clients with LDI solutions in place have seen their funding level improve over the month from strong growth
asset returns. For several of our clients, this has resulted in funding level triggers being reached with some
outright de-risking and LDI coverage extension off the back of this.
We also see clients looking to re-strike their yield triggers in line with the current forward curve.
Very low levels of equity market volatility combined with high outright market levels have contributed to
increased interest in solutions that reduce the volatility of growth asset returns.
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 May 2014
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
One
end
Month
31 May 30 Apr
2014
2014
Three
One
Months Year
28 Feb 31 May
2014
2013
Month end curve (LHS):
Nominal rates - Gilt markets
5 Year
1.85%
1.91%
1.84%
1.03%
10 Year
2.76%
2.86%
2.89%
2.22%
20 Year
3.48%
3.57%
3.62%
3.31%
30 Year
3.59%
3.65%
3.72%
3.70%
50 Year
3.42%
3.49%
3.54%
3.63%
1 Month change (RHS, Bps):
5.0%
10
2.5%
0
0
10
20
30
40
50
0.0%
-10
Real rates - Index-linked gilt markets
5 Year
-1.08%
-1.07%
-0.99%
-1.78%
10 Year
-0.38%
-0.32%
-0.20%
-0.94%
20 Year
-0.10%
-0.02%
0.07%
-0.28%
30 Year
-0.08%
-0.02%
0.05%
-0.12%
50 Year
-0.15%
-0.09%
0.00%
-0.11%
5 Year
3.05%
3.13%
3.03%
3.09%
10 Year
3.23%
3.29%
3.25%
3.33%
20 Year
3.56%
3.59%
3.57%
3.63%
30 Year
3.63%
3.65%
3.64%
3.72%
50 Year
3.64%
3.67%
3.62%
3.76%
2.0%
10
0.0%
0
-2.0%
-10
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
5 Year
-0.15%
-0.15%
-0.14%
-0.15%
10 Year
0.03%
0.04%
0.01%
0.05%
20 Year
0.20%
0.22%
0.20%
0.19%
30 Year
0.25%
0.25%
0.30%
0.33%
50 Year
0.16%
0.17%
0.22%
0.19%
Global bond markets
0.5%
10
0.0%
0
-0.5%
-10
0
10
20
30
50
Forward gilt curves
10 Year Bund
1.36%
1.47%
1.62%
1.51%
10 Yr Gilt / Bund Spread
1.20%
1.18%
1.08%
0.49%
10 Year US Treasury
2.48%
2.65%
2.65%
2.13%
10 Yr Gilt / US Spread
0.09%
0.02%
0.07%
-0.12%
5 year IG CDS - Euro
66
70
71
103
5 year IG CDS - US
62
64
64
79
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
31 May 30 Apr
2014
2014
40
50
28 Feb 31 May
2014
2013
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.68
1.69
1.67
SONIA
0.42%
0.42%
0.42%
0.40%
GBP / EUR
1.23
1.22
1.21
1.17
3m Libor
0.53%
0.53%
0.52%
0.51%
GBP / JPY
170.5
172.3
170.4
152.7
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
3.30%
3.53%
3.63%
3.49%
3.55%
ATM* Implied volatility
62.1
66.4
66.1
60.4
60.4
Source: Schroders, Bloomberg, 31 May 2014. *At the money. All data as at month end allowing for UK trading days.
2
40
1.52
Portfolio Solutions Monthly May 2014
For professional investors only
Market data: Risk management strategies
One
year
range
•L H
•
Equity indices
Month
One
end
Month
31 May 30 Apr
2014
2014
Three
One
Months Year
28 Feb 31 May
2014
2013
MSCI All World
201
199
194
176
FTSE 100
6,845
6,780
6,810
6,583
S&P 500
1,924
1,884
1,859
1,631
Euro Stoxx 50
3,245
3,198
3,149
2,770
Nikkei 225
14,632
14,304
14,841
13,775
13.6%
15.7%
4.1%
4.0%
MSCI All World Total Return (re-based to 100)
120
100
80
May 13
Aug 13
Nov 13
Feb 14
May 14
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
12.8%
13.1%
Skew (110 - 90)
4.2%
4.0%
ATM implied 1 year volatility
20.0%
15.0%
Skew (110 vol - 90 vol)
5.0%
4.0%
10.0%
May 13
Aug 13
Nov 13
Feb 14
May 14
3.0%
May 13
Aug 13
Nov 13
Feb 14
May 14
Equity risk management strategy indicators (FTSE 100 total return, spot prices)
Zero cost put spread collar
call strike
(70% / 90%)
109.2%
90% Put
Zero cost collar call strike
(90% Put)
1 yr
2.0%
107.8%
3 yr
5.1%
116.6%
123.6%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
3.1%
104.7%
105.6%
3 yr
6.5%
112.6%
117.7%
NB - one year range indicators for equity risk management strategies are based on month end values for the past 10 months.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 31 May 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 OverThe-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 May 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 June 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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