For professional investors and advisers only
Schroder ISF* Asian Convertible Bond
Monthly Newsletter
Covering May 2017
Market Overview
May
2017
1 year
3 years
(p.a.)
5 years
(p.a.)
I class
-0.54%
6.86%
3.98%
6.64%
A class
-0.68%
5.19%
2.34%
4.95%
BM
-0.09%
5.40%
4.02%
5.22%
I class
-0.66%
5.17%
3.23%
6.05%
A class
-0.80%
3.54%
1.60%
4.38%
BM
-0.21%
4.17%
3.37%
4.78%
C class
-0.79%
3.62%
1.63%
4.54%
A class
-0.84%
3.05%
1.04%
3.92%
BM
-0.25%
3.71%
2.85%
4.39%
Performance
%**
USD
EUR
CHF
Benchmark: Thomson Reuters Asia ex Japan Convertible Bond Index
(hedged for EUR/CHF)
**Euro hedged, CHF hedged and USD A and I share classes shown bid
to bid as at 31 May 2017, Source: Bloomberg. Portfolio data sourced
from Schroders (unaudited).
Source: Bloomberg/Schroders as at 31 May 2017.
Global stock markets continued on their upward slope in
May with strong gains on key global stock markets.
However, market participants reacted with sudden selling
pressure to reports on alleged obstruction of justice by the
president Donald Trump, a potentially impeachable offense.
Nasdaq-listed stocks suffered the biggest daily loss since
June last year and the US dollar lost about 2%. It took bullish
stock markets less than three days to fully recover but shows
how stretched markets may have become.
Asian markets were very bullish advancing between 1.7% in
Taiwan and a full 4.8% in Hong Kong. Chinas manufacturing
sector grew an undiminished pace in May. The manufacturing purchasing managers’ index published by the National
Bureau of Statistics came in at an expansionary 51.2.
Moody’s rating service had downgraded China by a notch but
the general relief of growth fears resulted in the fifth
consecutive month of stock market gains in Asia.
Overall, markets continued in a very calm fashion. All typical
volatility measure, historic rolling averages as well as
forward looking implied volatility are scoring extremely low
values. On this scale, the market is not pricing in much risk
and bulls remain firmly in control of the market.
The overall MSCI Asia ex Japan advanced 5.3%. Against this
strong equity backdrop, convertible bonds as measured by
the Thomson Reuters Asia ex Japan convertible index,
finished the month of May with a slight loss in USD terms.
Our fund underperformed its benchmark.
Portfolio Overview
We have maintained the fund’s strategic convexity
positioning, with equity exposure at around 40%. This is in
line with the strategic focus of our investment strategy and
close to what we consider the typical convexity “hotspot”.
In a tight universe of investable convertible, the higher
market cap convertibles were the main distractors this
month. This resulted in an underperformance against
benchmark and even more so against a buoyant stock
market.
In terms of country risk allocation we continue with a strong
overweight in China as well as in Hong Kong. Taiwan remains
the largest underweight relative to the index. Given that
Taiwan is a dominant chip and semi-conductor producer, we
also continue with an underweight to the IT sector. With
regard to other sector exposure, we are also underweight
real estate.
*Schroder International Selection Fund is referred
to as Schroder ISF throughout this document
The primary market for convertibles was quite active in May.
Globally, over USD 4.9bn of new paper were issued last
month. In Asia, we only saw a single new name coming to
the market. We were active in China Modern Dairy
(Mengniu).
Implied volatility, as a typical measure of the price for the
conversion right, stands at 28% while historic volatility
figures remain very. As a truly global convertible bond
specialist we are able to find pockets of cheap convexity
within our CB universe.
The fund’s running yield continues at around 0.4%. The
portfolio’s bond floor stands at a level of almost 90% while
the overall credit rating of the fund stayed on a BBB+
average with a credit spread of 178 basis points.
Schroder ISF Asian Convertible Bond
Covering May 2017
1
For professional investors and advisers only
Outlook and Strategy
In the long run, Asian stock markets - and hence convertible
bond markets - are driven by economic growth. In this
growth region of the world, it is China that sets the pace. Our
view of China is that it is quite resilient. Whenever China’s
growth engine stuttered in the past, it was monetary and
fiscal policy that jump-started it again. This has resulted in a
short-term improvement followed by a sudden overheating
and a policy reversal. The housing market is a good example
for this “on-and-off” behaviour.
Financing is crucial to economic growth and hence investors
need to carefully look at the impact of tighter credit policies
in China. Inflation figures remain benign, but the People’s
Bank of China (PBoC) has started to let short term interest
rates increase. The one-year Shanghai Interbank Offered
Rate, the interest rates at which banks offer to lend money to
other banks in the Shanghai banking market, rose to the
highest level since summer 2015. Higher short term rates
pose the threat of an inverted yield curve, a tell-tale sign for
a potential recession. While the PBoC will try not to
undermine official economic growth targets by an intensified
tightening, the direction of interest rate in China is clearly
upwards.
In late 2016, China changed the currency basket used to
measure the implied CNY exchange rate. In a nutshell this
resulted in a weakening of the yuan. But even by its own
measure, the currency should have been stronger. The
China Foreign Exchange Trade System has recently added a
*Schroder International Selection Fund is referred
to as Schroder ISF throughout this document
counter-cyclical factor to the FX fixing formula and we now
see a recent and but perhaps only short lived yuan
strengthening.
We think that longer-term currency cheapness remains a
solid boost for the Chinese export industry resulting in a
significant trade surplus with the US.
On the fiscal side, we believe that the government will
remain active and give further stimulus to the economy
despite rising government debt. At the same time, the official
growth target may be reduced in order to give President Xi
more breathing room. On balance, we believe that China
could grow by around 6 to 6.5% over the longer-term. The
balancing trick will be to continue the path of strong
economic growth while trying to wean off the large stateowned enterprises from the constant credit provision by
China’s banks. The same goes for the housing market, where
the PBoC still finds itself between a rock and a hard stone.
On a positive side, China still controls the banks, runs a large
current account surplus and can absorb a part of future
debts due to a low debt to GDP ratio.
The market for Asian convertible bonds remains cheap, as it
is under-researched and many convertible bond specialists
concentrate on Europe or US issues.
We continue to be of the opinion that convertible bonds offer
a compelling balance of risk and reward for investors looking
for Asian equity exposure.
Schroder ISF Asian Convertible Bond
Covering May 2017
2
Fund Data***
Team
Portfolio managers
Region Allocation
Dr. Peter Reinmuth
Chris Richards, CFA
Size & Holdings
Portfolio
Index
China
49.9%
43.0%
Hong Kong
19.4%
16.0%
India
0.0%
0.0%
Japan
2.4%
0.0%
Fund size in base currency (USD)
82 m
Malaysia
6.9%
6.6%
Number of issues
38
Philippines
2.2%
2.2%
Russia
0.0%
0.0%
Singapore
1.8%
6.8%
South Korea
0.4%
1.4%
11.2%
19.6%
Thailand
4.0%
4.4%
Australia
1.2%
0.0%
Cash
0.6%
0.0%
Portfolio
Index
6.6%
6.5%
Consumer Staples
3.7%
2.2%
Energy
3.9%
3.8%
11.3%
9.6%
6.6%
5.3%
Industrials
20.5%
18.6%
Information Technology
25.1%
27.0%
1.8%
0.00%
0.0%
0.00%
Real Estate
9.5%
16.9%
Telecommunication
Services
0.0%
0.00%
10.6%
10.1%
0.6%
0.00%
Portfolio Statistics****
Yield
0.44%
Effective Duration
1.47 years
Equity Sensitivity
35.65%
Delta
42.09%
Bond Floor
89.66%
Average Rating
BBB+
Credit Spread
178 bps
***Source: Schroders. Please note that the sector and country split
follows the underlying equity rather than the issuer.
****Average credit quality is based on official ratings where available
and implied ratings. Yield is estimated on a running yield basis.
Taiwan
Sector Allocation
Consumer Discretionary
Financials
Health Care
Materials
Others
Utilities
Cash
Schroder ISF Asian Convertible Bond
Covering May 2017
3
Credit Rating
AAA
AA
Equity Sensitivity
0.00%
0.00%
4.68%
3.08%
30.79%
36.66%
A
14.74%
16.26%
BB
CCC and
below
40.09%
35.57%
20-40%
25.38%
45.71%
42.70%
BBB
B
28.30%
0-20%
27.54%
40-60%
4.08%
1.31%
>60%
0.00%
0.00%
21.85%
8.60%
12.69%
Schroder ISF Asian Convertible Bond
Schroder ISF Asian Convertible Bond
Thomson Reuters Convertible Bond Asia ex Japan
Thomson Reuters Convertible Bond Asia ex Japan
Source: Schroders as at 31/05/2017.
Top Ten Issues
Holding
Portfolio
Sector
1
SMIC 2022
6.1%
Information Technology
2
Haitong 2021
6.0%
Real Estate
3
China Railway Construction 2021
5.7%
Industrials
4
China Overseas Land & Inv 2023
5.5%
Real Estate
5
Shenzhou 2019
4.5 %
Consumer Discretionary
6
CRRC 2021
4.4%
Industrials
7
Kingdee Intl Software 2019
4.1%
Information Technology
8
China Construction Bank / China Yangtze Power
4.0%
Financials
9
Kunlun 2019
3.9%
Energy
10
IHH Healthcare / Khazanah 2018
3.8%
Health Care
Source: Schroders as at 31/05/2017.
Important Information: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International
Selection Fund (the “Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.
Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest
audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment
Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable
indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders
has expressed its own views and opinions in this document and these may change. This document is issued by Schroder Investment Management Ltd., 31,
Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.
Risk Considerations: The capital is not guaranteed. Non-investment grade securities will generally pay higher yields than more highly rated securities but will be
subject to greater market, credit and default risk. A security issuer may not be able to meet its obligations to make timely payments of interest and principal. This
will affect the credit rating of those securities. Investments denominated in a currency other than that of the share-class may not be hedged. The market
movements between those currencies will impact the share-class. Investment in bonds and other debt instruments including related derivatives is subject to
interest rate risk. The value of the fund may go down if interest rate rise and vice versa. It may be difficult to sell quickly positions of one or more companies to
meet redemption requests upon demand in extreme market conditions. Emerging markets will generally be subject to greater political, legal, counterparty and
operational risk. Emerging equity markets may be more volatile than equity markets of well established economies. Investments into foreign currencies entail
exchange risks.
Schroder ISF Asian Convertible Bond
Covering May 2017
4