Portfolio Solutions Monthly April 2015
For professional investors only
Schroders
Portfolio Solutions Monthly
April 2015
Markets Dashboard
Yield changes (bps): Mar 15 to Apr 15
10 year
20 year
50 year
Risk asset market changes:
Mar 15 to Apr 15
FI Gilt yield
 +31
+25
 +18
MSCI All World

+2.2%
IL Gilt yield

+8
 +5
 +1
FTSE 100

+2.8%
RPI swap
FI Gilt / Swap
spread
 +17
+16
 +20
5yr Euro CDS

+5 bps

 -2
 -6
1 year 90% FTSE 100 put

-
+5
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 April 2015. Change in equity put is the outright change in premium.
Funding level dashboard
1 year reference funding level progression
1 month attribution of funding level change
90%
88%
86%
84%
Mar
funding
level:
85%
Nominal
rates:
+1.8%
Real
rates:
+0.4%
Growth
assets:
+1.9%
Apr
funding
level:
90%
Source: Schroders, Bloomberg, 30 April 2015. Please refer to the supporting notes for further details.
Bonds: It’s a risky business
The graph to the right shows the intra-day change
(measured by absolute difference between day high
and day low) in yield for the generic 10 year gilt over
varying periods.
Gilt yields are used to measure defined-benefit
pension liabilities and their volatility (unless matched)
is a key driver of volatility (or risk) in funding levels
and deficits.
Intra-day volatility has increased markedly over the
past year. In the first half of 2014, there was a 50%
chance of yields changing by between 0.03% and
0.05% intra-day (largest orange bar). In 2015 the
intra-day distribution has changed. Most startling is
the fact that in over 20% of 2015 observations 10year yields have moved by between 0.1% and 0.2%.
Therefore, once-a-week for our Reference Pension
Scheme* the size of liabilities has changed by
10 Year Gilt
Over 20% of intra-day
changes were over 10bps
Source: Schroders, Bloomberg to 5 May 2015
* See Notes on page 4.
between 2% and 4% depending what time of the day
you look at the market.
Contact us
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 April 2015
For professional investors only
Market data: LDI markets
One
year
range
•L H•
Month
end
30 Apr
2015
One
Month
31 Mar
2015
Three
One
Months Year
31 Jan 30 Apr
2015
2014
Month end curve
Nominal rates - Gilt markets
5 Year
1.34%
1.12%
0.93%
1.91%
10 Year
1.97%
1.66%
1.38%
2.86%
20 Year
2.58%
2.34%
2.05%
3.57%
30 Year
2.69%
2.47%
2.20%
3.65%
50 Year
2.53%
2.35%
2.07%
3.49%
1 Month change (RHS, Bps):
4.0%
40
2.0%
0
0
10
20
30
40
50
0.0%
-40
Real rates - Index-linked gilt markets
5 Year
-1.25%
-1.22%
-1.27%
-1.07%
10 Year
-0.91%
-0.98%
-1.04%
-0.32%
20 Year
-0.83%
-0.88%
-0.95%
-0.02%
30 Year
-0.83%
-0.87%
-0.93%
-0.02%
50 Year
-0.90%
-0.91%
-0.95%
-0.09%
5 Year
2.89%
2.69%
2.48%
3.13%
10 Year
3.11%
2.94%
2.73%
3.29%
20 Year
3.46%
3.30%
3.10%
3.59%
30 Year
3.52%
3.36%
3.17%
3.65%
50 Year
3.55%
3.35%
3.16%
3.67%
2.0%
20
0.0%
0
-2.0%
-20
0
10
20
30
40
50
Inflation rates - RPI swap market
5.0%
30
2.5%
0
0.0%
-30
0
10
20
30
40
50
Nominal gilt curve vs swap curve
5 Year
-0.20%
-0.22%
-0.26%
-0.15%
10 Year
0.02%
-0.03%
-0.08%
0.04%
20 Year
0.35%
0.37%
0.30%
0.22%
30 Year
0.42%
0.45%
0.40%
0.25%
50 Year
0.32%
0.38%
0.31%
0.17%
Global bond markets
0.5%
10
0.0%
0
-0.5%
-10
0
10
20
30
40
50
Forward gilt curves
10 Year Bund
0.37%
0.18%
0.30%
1.47%
10 Yr Gilt / Bund Spread
1.46%
1.39%
1.02%
1.18%
10 Year US Treasury
2.03%
1.92%
1.64%
2.65%
10 Yr Gilt / US Spread
-0.19%
-0.34%
-0.31%
0.02%
5 year IG CDS - Euro
61
56
60
70
5 year IG CDS - US
63
64
70
64
4.0%
2.0%
Gilt curve
3 yrs fwd
0.0%
0
Currency rates
Money markets
1 yr fwd
5 yrs fwd
10
20
30
40
50
30 Apr
2015
31 Mar
2015
31 Jan
2015
30 Apr
2014
1.69
Bank of England base
0.50%
0.50%
0.50%
0.50%
GBP / USD
1.54
1.48
1.51
SONIA
0.45%
0.45%
0.44%
0.42%
GBP / EUR
1.37
1.38
1.33
1.22
3m Libor
0.57%
0.57%
0.56%
0.53%
GBP / JPY
183.3
178.0
177.0
172.5
3y20y
5y20y
3y30y
5y30y
Interest rate swaptions as at month end:
1y20y
ATM* Forward
Par swap rate
2.25%
2.35%
2.40%
2.33%
2.35%
ATM* Implied volatility
86.2
84.1
77.6
81.9
75.3
Source: Schroders, Bloomberg, 30 April 2015. *At the money. All data as at month end allowing for UK trading days.
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Portfolio Solutions Monthly April 2015
For professional investors only
Market data: Risk management strategies
Month
end
30 Apr
2015
One
Month
31 Mar
2015
MSCI World
1,778
1,741
1,678
1,688
FTSE 100
6,961
6,773
6,749
6,780
S&P 500
2,086
2,068
1,995
1,884
Euro Stoxx 50
3,616
3,697
3,351
3,198
Nikkei 225
19,520
19,207
17,674
14,304
16.2%
13.1%
5.1%
4.0%
One
year
range
•L H•
Three
One
Months Year
31 Jan 30 Apr
2015
2014
Equity indices
MSCI All World Total Return (re-based to 100)
120
100
80
Apr 14
Jul 14
Oct 14
Jan 15
Apr 15
Equity option market indicators (FTSE 100, 1 year)
ATM* Implied volatility
15.9%
15.6%
Skew (90 - 110)
4.7%
4.8%
ATM implied 1 year volatility
20.0%
Skew (90 vol - 110 vol)
6.0%
5.0%
15.0%
4.0%
10.0%
Apr 14
Jul 14
Oct 14
Jan 15
Apr 15
3.0%
Apr 14
Jul 14
Oct 14
Jan 15
Apr 15
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
3.4%
106.8%
3 yr
6.6%
114.0%
126.0%
95% Put
Zero cost collar call strike
(95% Put)
Zero cost put spread collar
call strike
(70% / 95%)
1 yr
4.6%
104.2%
106.3%
3 yr
9.9%
109.8%
119.2%
NB - one year range indicators for equity risk management strategies are based on month end values.
Source: Schroders, Bloomberg, Merrill Lynch, Credit Suisse, 30 April 2015. *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 April 2015
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 May 2015 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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