schroders iam 12 annual investment conference · ugo montrucchio, cfa, caia - multi-asset portfolio...
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Negative yields; How to stay positive
16 December 2016
Schroders IAM 12th Annual
Investment Conference
For professional investors only. This material is not suitable for retail clients
2016 - Politics The people flex their muscle
1
-15% -10% -5% 0% 5% 10% 15% 20%
European Equity
Japanese Equity
Hedge Funds*
Cash
US Treasuries
Property*
EMD Local Currrency
Commodities
EMD (US Dollar)
Corporate Bonds
US Equity
Emerging Mkt Equities
UK Equities
High Yield
Infrastructure
Asset class returns over 12 months As at 30 November 2016
2
Source: Schroders, Datastream as of 30 November 2016. UK Equity: FTSE All Share Index, Emerging Equity: MSCI Emerging Markets Index, Japanese Equity: Topix Index, European Equity: Eurostoxx 50 Index, US Equity: S&P 500 Index, EMD (US dollar denominated): JPM EMBI Global Composite Index, EMD (local currency denominated): JPM GBI-EM Global Diversified Composite Index, High Yield: BoA/ML Global High Yield Index, Investment Grade Credit: BoA/ML Non-Gilts All Stocks Index, US Treasuries: Bank Of America Merrill Lynch Treasury Master (USD),Commodities: DJ-UBS Commodity Index, Hedge Funds: HFRI Funds of Funds Composite Total Return Index, Infrastructure: International Public Partnership (representative only), Cash:3 month £ LIBOR; Property: UK IPD Index. All show total return either in local currency or currency of denomination since passive currency exposure is hedged. *12 months to 31 October 16 as November data isn't yet available.
Equities
Alternatives
Government Bonds & Credit
Cash
Return (%)
Contents Schroders 12th Annual Investment Conference at Lloyd’s
Agenda Page 4
Speaker biographies Page 5
Presentations
Economics: Bonds... All change!
Fixed Income: the hunt for yield
continues
Multi-asset: investing for the capital
aware
Emerging Market Debt: is 2016 the
beginning of a post crisis era?
Page 8
Page 33
Page 52
Page 67
Agenda Schroders 12th Annual Investment Conference at Lloyd’s
09.15 Introduction Charles Matterson, Insurance Asset Management
09.30 Economics: bonds…all change! Trump, Brexit and the Emerging Markets
Keith Wade, Chief Economist
10.00 Fixed income: yield hunting How value investing can help David Harris, Investment Director, US Fixed Income
10.30 Coffee break
10.45 Multi-Asset: investing in risky assets as an insurer:
Four challenges and a solution Ugo Montrucchio, Fund Manager, Multi-Asset
Clara Yan, Insurance ALM Director
11.15 Emerging Market Debt: is 2016 the beginning of a post crisis era? Opportunities after 3 years of seismic change Matthew Michael, Product Director, Emerging Market Debt and
Commodities
11.45 Closing remarks Charles Matterson, Insurance Asset Management
12.00 Depart for lunch at The Factory House No. 10 Lime Street, EC3M 7AA
4
Speaker biographies
Charles Matterson, Insurance Asset Management
Charles joined Schroders in 2008 to help manage relationships and design investment solutions for insurance
clients. He has extensive experience covering clients in the UK and the US
Prior to joining Schroders Charles was a Managing Director and Head of Interest Rate Sales at Dresdner
Kleinwort Benson. His 30 years investment experience include Fixed Income sales roles at Barclays and Credit
Lyonnais
Charles has an MA in Arabic Studies from Cambridge University
Keith Wade, Chief Economist & Strategist, Schroders
Keith is responsible for our economics team which sets our house view on the Global economy. He is a member
of Schroders’ Global Asset Allocation Committee, which is responsible for Asset Allocation views across our
Multi-Asset strategies
Keith became our senior economist responsible for international economic forecasting in early 1992. He joined
Schroders in 1988 as UK Economist. Prior to Schroders he was a researcher at the London Business School's
Centre for Economic Forecasting
He is a Member of the UK Society of Investment Professionals (UKSIP) and the Society of Business Economists.
A Trustee and Chair of the Investment Committee at Addenbrookes Charitable Trust in Cambridge. He is a
regular contributor to the financial press and has co-authored a book on macro-economics for MBA students
Keith has an MSc (and BSc) in Economics from the London School of Economics.
5
Speaker biographies
David Harris, Senior Fixed Income Director
David joined Schroders in 1992
In 1990, he joined Irwin Management Company as a Financial Analyst, prior to which he worked with Weston
Financial Group
David’s Investment career commenced in 1986 at State Street Bank & Trust
MBA, J.L. Kellogg Graduate School of Management, Northwestern University. BBA, University of Massachusetts
at Amherst
Ugo Montrucchio, CFA, CAIA - Multi-Asset Portfolio Manager
Ugo joined Schroders in December 2013 and is based in London. He is a portfolio manager for the Strategic
Beta portfolios. He is a member of the Credit risk premia research team
Prior to joining Schroders, Ugo worked as a Director at BlackRock from 2007 (formerly Barclays Global
Investors) where he was the lead portfolio manager specialising in diversified growth and risk parity strategies.
He joined as a research associate in 2006 in the Liability Driven Investment (LDI) Team.
Ugo also worked as a fixed income investment analyst at Barings Asset Management from 2004 to 2006. He
was the joint portfolio manager specialising in a bespoke cash-based LDI strategy. Ugo’s career commenced in
2000 at Barra International Ltd, where he worked as a consultant to portfolio/risk managers
CFA and CAIA Charterholder
BSc in Economics, Turin (Italy); MSc Finance, Greenwich (UK)
6
Speaker biographies
Clara Yan, Insurance ALM Director
Joined Schroders in 2015 to provide technical insurance and ALM expertise for insurers in the UK and
Continental Europe.
From 2009-2015 Clara was at the investment banking arm of UBS where she worked with UK and European
insurance clients on ALM issues and helped build UBS’s Delta ALM modelling tool. Previously, she was
Senior ALM strategist at Legal and General, helping to build its ALM model and manage its balance sheet.
BCom in Actuarial Studies from Macquarie University; an MSc in Financial Mathematics from the Cass
Business School.
Fellow of the Institute of Actuaries in the UK and Australia.
Matthew Michael, Product Manager – Emerging Market Debt &
Commodities
Matthew joined Schroders in 2004, as an Investment Executive for Emerging Market Equities later joining the
EMD, Commodities & Currencies team as Product Manager in 2006.
His Investment career commenced in 2000 at The Royal Bank of Scotland as a junior currency trader. He then
joined Russell Investment Co. as a rebalancing analyst
MSc in International Finance, CERAM European Business School, France. Investment Management
Certificate (IMC), Financial Planning Certificate (FPC)
7
Macro outlook Negative yields, how to stay positive
Keith Wade | Chief Economist
December 2016 | For professional investors only. This material is not suitable for retail clients
Yields rise, but many bonds remain on negative yields $4 trillion developed market sovereign bonds have a negative yield
9
Source: Bloomberg, Schroders Economics Group, at 2 December 2016
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
0%
5%
10%
15%
20%
25%
30%
35%
Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17
Value of Bloomberg Developed Soverign Bond index with negative yields, rhs
% of Bloomberg Developed Sovereign Bond index with negative yields, weighted
$USD trillion
The global macro outlook Key questions
President Trump – what can we expect for the economy?
Europe after Brexit
– Has the UK shrugged off Brexit?
– A year of political risk ahead in Europe
Emerging markets, brighter outlook?
Outlook and risks
10
Source: Schroders
Global snapshot GDP since the crisis, dispersion persists
11
Source: Thomson Datastream, Schroders Economic Group, at 18 November 2016
UK
US
Spa
EZ
Ger
Ita
Jap
90
95
100
105
110
115
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Index (100 = 2007 Q4)
Emerging markets show signs of life Developed markets vs emerging markets PMIs
12
Source: Thomson Datastream, Markit, Schroders Economics Group, at 10 November 2016
35
40
45
50
55
60
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Balance
Developed markets Emerging markets
US
President Trump
Grow the economy 4% p.a. and create at least 25 million new jobs
Economy has not grown at 4% since 2000
14
Source: Thomson Reuters Datastream, Schroders Economic Group, at 10 November 2016
-6
-4
-2
0
2
4
6
8
10
1960 1970 1980 1990 2000 2010
4Q % change of GDP (AR): United States
5Y moving average of 4Q % change of GDP (AR): United States
GDP y/y%
Create 25 million jobs I would not start from here
Source: Thomson Datastream, Schroders Economics Group, at 15 November 2016
15
48
50
52
54
56
58
60
62
64
66
68
70
0
2
4
6
8
10
12
14
16
18
20
22
50 55 60 65 70 75 80 85 90 95 00 05 10 15
Republican Unemployment rate (%), lhs
Participation rate (%), rhs
3
4
5
6
7
8
9
101.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
90 92 94 96 98 00 02 04 06 08 10 12 14 16
ECI (wages and salaries)Unemployment rate (% inverted), rhs
y/y % y/y %
Will Trump label China a “currency manipulator”? RMB continues to depreciate, but reserves are falling
16
Source: Thompson Reuters Datastream, Schroders, at November 2016
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
6.0
6.5
7.0
7.5
8.0-80
-60
-40
-20
0
20
40
60
80
Change in FX reserves ($bn 6 month moving average) Chinese Yuan to USD (WMR) - RHS
Brexit
“England has collapsed
politically, monetarily and
economically”
Mark Rutte, Dutch PM
Brexit What they said
“You cannot discern that anybody in the British Isles had a plan”
Frank-Walter Steinmeier, German foreign minister
“The Brexit vote…yet again reflected the drawbacks of Western democracy”
Yang Chengxu, former Chinese ambassador to Vienna
“Brexit means Brexit” Theresa May UK Prime Minister
Source: Financial Times, 02/03 July 2016. The Economist magazine, at 30 June 2016
18
Near-term impact of Brexit on UK economy New post-Brexit forecast: Stagflation looms
19
Source: Thomson Datastream, Schroders Economics Group, at 25 November 2016. Previous forecast refers to May 2016
Europe
Brexit, Trump…Le Pen?
Concerns have shifted from the economy to immigration What are the two most important issues facing the EU?
Note: numbers do not sum to 100. Source: Standard Eurobarometer report No.85 Spring 2016. Schroders Economics Group
21
46 43
59
54 53
48 45
39
33
27
19
14
20
9 9 8
10 16
21 24
38
58
48
27 23 26
32
36
38 36
34
29
24
15
21 22
31 34
32 30
26 25
25
23
16
8 8 6 6 6 7
8
7 7 8 9
15 13
7
5 4 7
6
6
11 17
39
0
10
20
30
40
50
60
70
2010 2011 2012 2013 2014 2015 2016
Immigration, 48
Economic situation, 19
Terrorism, 39
Public finances, 16
Unemployment, 15
Crime, 9
Political risk set to return in Europe A roadmap and guide to upcoming events
Source: Schroders Economics Group, at 28 September 2016
22
Country Event risk Date Probability Market impact
Hungary Migrant quota rejected in referendum 02 October 2016 High Low
Austria Re-run of presidential election with far-right
Freedom party winning
04 December 2016 Medium Low
Italy Constitutional referendum, leading to Renzi
losing his job
04 December 2016 Medium High
Netherlands General election with the Party for Freedom
calling an EU referendum
15 March 2017 High Medium
France Presidential elections with the National Front
winning
23 April and 7 May
2017
Low Extreme
Germany Federal election with Alternative for Deutschland
winning
Aug – Oct 2017 Very low Extreme
UK Article 50 triggered By March 2017 High Low
ECB QE continues, but for how long? QE set to end March 2017, but expect an extension
23
Source: Thomson Datastream, Markit, CBI, ONS, Schroders Economics Group, at 14 November 2016; RHS Thomson Reuters Datastream, Schroders, at 18 November 2016
10
15
20
25
30
35
1,000
1,500
2,000
2,500
3,000
3,500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ECB balance sheet, Euro bn
ECB balance sheet, % of GDP, rhs
(EUR ,x1000)
-2
0
2
4
6
8
10
2011 2012 2013 2014 2015 2016
Recession band German Bund Spain Italy Ireland
10y sovereign bond yield, %
Emerging markets
Return to favour?
-3
-2
-1
0
1
2
3
RUB BRL INR CNY
Upper quartileLower quartileCurrent nominal TW exchange rate (10yr z-score)Last year
Expensive
Cheap
Currencies remain in focus CNY detaches from strong dollar, whilst GBP, RUB and BRL are cheap
25
Source: Thomson Datastream, Schroders Economics Group, at 30 November 2016
-3
-2
-1
0
1
2
3
4
EUR JPY GBP USD
Upper quartile
Lower quartile
Current nominal TW exchange rate (10yr z-score)
Last year
Expensive
Cheap
EM inflation trending lower Provides scope for rate cuts
Source: Thomson Datastream, Schroders Economics Group, at 25 October 2016
26
0
1
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015 2016
EM inflation LatAm inflation Asia inflation CEEMEA inflation
%, y/y
China activity model shows improving picture Effects of stimulus being felt
Source: Thomson Datastream, Schroders Economics Group calculations, at 19 September 2016
27
5
7
9
11
13
15
17
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
New China G-tracker China GDP
y/y
Outlook and risks
Forecast update: Trump raises growth and risks Global growth is upgraded for the first time in nearly two years
Source: Schroders Economics Group, at 25 November 2016
29
5.0
2.7 3.2
3.9
5.0 4.7
5.2 5.3
2.4
-0.7
4.9
3.6
2.7 2.5
3.0 2.8 2.6
2.8 3.0
-3
-2
-1
0
1
2
3
4
5
6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Contributions to World GDP growth (y/y), %
US Europe Japan Rest of advanced BRICS Rest of emerging World
Forecast
Political risk is captured by “US fiscal
reflation”, “Trump trade wars” and “Le
Pen breaks Europe”. We have also
brought back “Russian rumble” which
assumes that President Putin invades
the rest of Ukraine
In “Bond yields surge” a US recession is
triggered by a severe tightening of
monetary conditions
“Currency wars return” assumes a
series of competitive devaluations.
“Secular stagnation” that the world is in
a chronic downturn
Scenario grid: outcomes vs. baseline Risks are still skewed toward the downside on growth
30
Source: Schroders Economics Group, at 25 November 2016. Please note the forecast warning at the back of the document
Currency wars return
US fiscal reflation
Bond yields surge
Secular stagnation
Trump trade wars
Baseline
Russian rumble
Le Pen breaks Europe
-1.5
-1.0
-0.5
+0.0
+0.5
+1.0
+1.5
-1.5 -1.0 -0.5 +0.0 +0.5 +1.0 +1.5
Cu
mu
lative
20
17
/18
in
fla
tio
n v
s.
ba
se
line
fo
reca
st
Cumulative 2017/18 growth vs. baseline forecast
Stagflationary Reflationary
Productivity boost Deflationary
The global macro outlook Key takeaways
President Trump
– Fiscal plans spell higher growth, but also higher inflation, rates and USD
– Trade war? Creates stagflation risk, but probably more talk than action
Europe after Brexit
– UK? OK so far, but Brexit impact yet to come and will be aggravated by delays to trade deal
– A year of political risk ahead in Europe: do not ignore Le Pen
Emerging markets, brighter outlook?
– Fed rate hikes are challenge, but growth returning, currencies are competitive and capital accounts better
balanced
– China Party Congress points to year of macro stability, but serious challenges remain
31
Source: Schroders, at 30 November 2016
The views and opinions contained herein are those of Keith Wade, and may not necessarily represent views expressed or reflected in other Schroders
communications, strategies or funds.
This document 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 Schroders does not warrant its
completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. 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 reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get
back the amount originally invested.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and
regulated by the Financial Conduct Authority
For your security, communications may be taped or monitored.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own
assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes
to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
Important information
32
Yield hunting How value investing can help
16 December 2016
David Harris | Senior Investment Director, Fixed Income
December 2016 | For professional investors only. This material is not suitable for retail clients
US 10yr Treasury yield since 1790
Yields are low Really low
34
Source: Deutsche Bank; data at September 2016
Lessons from 2016 Enough financial repression
35
The views and opinions contained herein are those of the Schroders US Fixed Income; at December 2016.
Brexit
Trump
No Matteo
Next….
Low savings incentive + income inequality = FRUSTRATION!
Corporate taxes
Personal taxes
Spending
Trade
Immigration
Healthcare
Sources: Schroder Economics Group, Trump Campaign; at 30 November 2016
Trump’s challenge for the markets Focus on tax cuts, infrastructure spending and trade policies
36
US interest rates No longer an easy call…
37
The views and opinions contained herein are those of the Schroders US Fixed Income; at December 2016
Cyclical:
Capacity
Wages rising
Wage Growth Tracker1 (median YoY change in matched individuals’ wages)
US interest rates Wages picking up – job-switchers are seeing 4+% wage increases
38
1Source: Atlanta Fed; data at October 2016 2Source: Bloomberg; data at October 2016
Personal Consumption2
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(%)
US interest rates No longer an easy call…
39
The views and opinions contained herein are those of the Schroders US Fixed Income; at December 2016
Cyclical:
Capacity
Wages rising
Inflation
Fiscal stimulus
Trade barriers
Supply!
Secular:
Demographics
US Interest rates
40
Source: Schroders, BLS, NSA
The real issue is not if inflation shows, it’s where
Average Age of Baby Boomers
0
10
20
30
40
50
60
70
80
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Ag
e (
years
)
Baby Boom Age Range
Average
Impact of negative REAL interest rates
Negative real rates Boomer age Price increases When
I Jun 1974 – Oct 1977 20 – 23 Consumer goods/services Late 1970’s
II Nov 1991 – Jan 1994 37 – 40 Stocks/financial assets Late 1990’s
III Oct 2001 – Dec 2004 47 – 50 Housing Mid 2000’s
IV Mar 2008 – Now 55 – 58 Healthcare/bonds Mid 2010’s
-8
-6
-4
-2
0
2
4
6
8
10
12
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Perc
en
tag
e (
%)
Federal funds rate minus core inflation
US Interest rates No longer an easy call…
41
The views and opinions contained herein are those of the Schroders US Fixed Income; at December 2016
Cyclical:
Capacity
Wages rising
Inflation
Fiscal stimulus
Trade barriers
Supply!
Secular:
Demographics
Globalisation
Debt load
Technology
Profits
Wealth
Cyclical/Secular ebb and flow will elevate uncertainty
Fed fund futures at different points in time
Macro trends are difficult to predict Market pricing continues to suggest rate hikes…to no avail
42
Source: DB Global Markets Research; FRB, Bloomberg, Haver Analytics; at November 2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Effective fed funds rate Fed funds futures pricing
$ IG
$ HY
$ BB
$ B
$ HY ex Ene/Met
AAA A BBB BB B
€ IG
€ HY
€ BB
€ SubFin
€ B
Germany
Italy
Portugal
Spain
-2%
0%
2%
4%
6%
8%
£ IG
£ HY
The yield desert Low yields everywhere
43
Note: Red represents USD-denominated bonds, light blue represents Euro-denominated bonds, orange represents GBP-denominated bonds and grey represents EMD and
others. Bubbles size represents size of market value.
Sources: Schroders, BoAML; data at November 2016
Yield to worst (%)
Credit quality
The US yield desert Less arid: 4 year yield-to-worst, market size, and rating
44
Source: Bloomberg, SIFMA, at November 2016
US Treasury
Agency MBS
Agency/Quasi
Corp - AAA Corp - AA
Corp - A
Corp - BBB
Corp - HY
Munis - AA
Munis - A ABS - IG
ABS - HY
CMBS - IG Non-Agency MBS - IG
Non-Agency MBS - HY
EMD Sov - IG
EMD Sov - HY
EMD Corp - IG
EMD Corp - HY
ILS
AAA AA A BBB HY 0%
1%
2%
3%
4%
5%
6%
7%
8%
Yield to worst (%)
Credit quality
US investment grade corporates – industry divergence Target five-year maturities, single-A rated
45
Source: Barclays, at November 30, 2016
Monthly sector excess returns (Barclays US Corporate Index – last 5 years)
0
2
4
6
8
10
12
-8
-6
-4
-2
0
2
4
6
8
10
Difference (Top - Bottom Sector) rhs Industrial Basic Industry
Chemicals Metals & Mining Capital Goods
Aerospace/Defense Building Materials Diversified Manufacturing
Construction Machinery Communications Telecommunications
Consumer Cyclical Automotive Home Construction
Consumer Noncyclical Consumer Products Food and Beverage
Health Care Pharmaceuticals Energy
% %
Issuer price divergence Turbulence beneath the appearance of calm
46
Source: Bloomberg, at November 30, 2016
6 month total return (Barclays US Corporate Index – A Rated, 3-7 year maturity)
Ratings
Description Coupon Maturity Date Price YTW OAS M F S 6M Total Return
CONTINENTAL AIRLINES INC 4.8 1/12/2021 105.18 2.94 135.4 A3 - A 2.79%
AMERICAN AIRLINES 5.3 1/31/2021 106.77 2.84 126.4 A3 - A 2.77%
RIO TINTO FINANCE USA LTD 3.5 3/22/2022 103.81 2.69 73.6 Baa1 A-u A- 1.67%
RIO TINTO FINANCE USA PLC 2.9 8/21/2022 100.86 2.71 65.2 Baa1 A-u A- 1.56%
HUNTINGTON NATIONAL BANK 2.9 8/20/2020 101.29 2.50 89.9 A3 A- BBB+ 1.33%
BHP BILLITON FINANCE 3.9 9/30/2023 105.73 2.92 74.4 A3 A+u A 1.29%
AIRGAS INC 2.9 11/15/2022 100.33 2.84 74.4 A3 - A- 1.10%
CONOCOPHILLIPS 2.9 11/15/2021 100.39 2.79 87.8 Baa2 A- A- 1.02%
SOUTHERN CALIFORNIA EDISON 1.8 2/1/2022 98.71 2.35 79.5 Aa3 A+ A 0.73%
TRANSCANADA PIPELINES 2.5 8/1/2022 97.21 3.04 100 A3 - A- 0.69%
UNITED TECHNOLOGIES 8.8 3/1/2021 124.17 2.69 99.3 A3 A-u A- -4.68%
STATE STREET CORP 3.7 11/20/2023 104.58 2.97 77.9 A1 AA- A -4.82%
COCA-COLA FEMSA SAB SA 3.9 11/26/2023 101.59 3.62 141.6 A2 A- A- -4.85%
KIMBERLY-CLARK CORP 2.4 6/1/2023 98.00 2.74 58.5 A2 A A -4.90%
BRISTOL-MYERS SQUIBB 7.2 6/15/2023 124.49 3.00 89.3 A2 A-u A+ -4.96%
HERSHEY FOODS CORP 2.6 5/1/2023 98.46 2.89 73.3 A1 - A -5.00%
PHILIP MORRIS INTL INC 3.6 11/15/2023 103.63 3.02 82.8 A2 A A -5.09%
BRISTOL-MYERS SQUIBB 3.3 11/1/2023 103.37 2.71 52.5 A2 A-u A+ -5.14%
COCA - COLA ENTERPRISES INC. 8.5 2/1/2022 128.07 2.65 75.6 WR A+ AA- -5.39%
LACLEDE GAS 3.4 8/15/2023 101.50 3.14 96.1 A1 A A -5.67%
Alpha matters Compound effects of excess return
47
Source: eVestment, at September 2016.
Past performance is not a guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Performance is stated gross of fees..
Gro
wth
of $
100
893
559
694
772
100
200
300
400
500
600
700
800
900
Value Manager Barclays US Aggregate Index Median Competitor Top Quartile Competitor
Value at work Effects of return differentiation
48
Source: eVestment, at 30 September 2016. Past performance is not a guarantee of future results. The value of an investment may go down as well as up and is not guaranteed.
Performance is stated gross of fees. Please see the Appendix for additional information.
100% Median core universe performance
90% / 10%
80% / 20%
70% / 30%
60% / 40%
50% / 50%
40% / 60%
30% / 70%
20% / 80%
10% / 90%
100% Value manager
0.5%
1.0%
1.5%
2.0%
2.5%
0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
5 y
ea
r a
nn
ua
lis
ed
ex
ce
ss
re
turn
5 year standard deviation of total return
5 year risk / return
Investment summary 2017 US bond market guidelines
49
The views and opinions contained herein are those of the Schroders US Fixed Income; as of December 2016.
US interest rates higher, but probably not too much
– Secular deflationary forces ultimately limit the impact of cyclical inflationary forces
– Higher US yields are already attracting capital from low-yielding regions
Without rising interest rates, yield will be the main driver of returns
– Risk premium vary widely by sector and industry
Growth not too hot or too cold for corporate credit
– Rapidly evolving policy outlook suggests divergent industry returns
Security selection determined by more than just industry
– Idiosyncratic factors will be at least as important as the last two years
Characteristics of some non-corporate sectors offer good risk-adjusted yield and diversification
– The securitised market is naturally short maturity, a large part of which is floating rate
– Commercial MBS stand out as having good value
Conclusion
50
Solution
Investment objectives
Available tools
Investment risks and controls
Investment universe
The views and opinions contained herein are those of the Schroders US Fixed Income; at December 2016
No longer just matching maturities
or replicating market exposures
Use markets to your advantage
• Understand your primary/secondary goals, as
well as less conventional tools at your
disposal
• Survey the market for the broadest possible
universe of investments
• Balance credit, structure and liquidity risks
Seek out a customised solution
Important information
The views and opinions contained herein are those of David Harris, Senior Investment Director, Fixed Income, and may not necessarily represent
views expressed or reflected in other Schroders communications, strategies or funds.
This document 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 Schroders does not
warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. 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 reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may
not get back the amount originally invested.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and
regulated by the Financial Conduct Authority
For your security, communications may be taped or monitored.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on
our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you
with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
51
Investing in risky
assets as an insurer:
Four challenges and a solution
December 2016
Ugo Montrucchio | Fund Manager, Multi-asset
December 2016 | For professional investors only. This material is not suitable for retail clients
Clara Yan | ALM Director, Insurance Asset Management
Agenda
53
Four challenges posed by investing in risky assets as an insurer
Our solution
Challenge 1 - Volatility Problems with holding risky assets
Source: Schroders, BoA, at December 2016. Performance attribution assumes no transaction costs as well as flat yield curves (providing no roll-down component). Simulation
analysis assumes defaults to be in line with current market expectations, no transaction costs and a yield shift occurring at mid point of the scenario horizon
Future returns will be challenging; dynamic asset allocation is key
54
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
196
6
196
8
197
0
197
1
197
3
197
5
197
6
197
8
198
0
198
1
198
3
198
5
198
6
198
8
199
0
199
1
199
3
199
5
199
6
199
8
200
0
200
1
200
3
200
5
200
6
200
8
201
0
201
1
201
3
201
5
S&P 500 (inflation adjusted) drawdowns
…and potentially distorted some relationships
between asset classes
Years of monetary stimulus may have turned investors
unduly complacent towards market volatility
Rolling asset class correlations
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
3 year rolling correlation between the S&P 500 and DJUBS
3 year rolling correlation between S&P 500 and CGBI USBIG CORP.AAA/AA 7-10Y
** Remove from final presentation **
By exposure By Risk
Challenge 2 - Diversification Asset allocation exposure does not equal risk exposure
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
Exposure-based asset allocation can lead to an over-concentration of risk
Simply adding asset classes does not improve diversification
Equity Fixed Income Alternatives
60/40 Long-term
investment model 60/40 Long-term
investment model
55
Diversify by risk, not asset class
Source: Schroders. The views and opinions are those of the Multi-Asset team and may change.
Long-term Investment Model is calibrated upon the asset allocation of a large North-American endowment scheme
** Remove from final presentation **
Challenge 3 – risk vs capital Risk does not equal capital for an insurer
56
Source: UBS Delta, Swiss Re, Barclays Point, EIOPA
Risk is defined as the standard deviation of return over five years. Capital is calculated using Solvency II standard formula.
The return used above are the result of statistical modelling, based on a number of assumptions and should not be considered as a prediction of future returns
20%/100%
Return (%)
-4
4
8
Risk/capital (%)
German Gov bond
US Gov bond
Portugal Gov bond Commodities
Global Equities
Securitisation
Insurance Linked Securities
Infrastructure Debt
0%
Screen out capital inefficient investments
Capital
Risk
** Remove from final presentation **
Insurers need the ability to control the capital consumption of their risk assets
Challenge 4 – Capital instability Dynamic asset allocation can lead to capital volatility
57
React to market changes.
Take advantage of short term market opportunities.
Apply active risk management process.
Source: Schroders, Insurance ERM, at December 2016. For illustration purpose only
Dynamic asset allocation:
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 Jul-2016
Typical dynamic asset allocation vs SCR
Other
Alternatives
Inflation
Currency
Corporates
Government Bonds
Equity
SCR
Capital impact: Capital impact is not typically considered in a standard
dynamic asset allocation process.
Varying asset allocation can lead to capital uncertainty
Capital can be prohibitively high, exceeding the standard
equity capital charge of 39%
** Remove from final presentation **
We want a diversified, actively managed strategy with lower capital than equities
Thinking about a Solution Can we overcome these four challenges in one, easy-to-invest in solution?
58
Inefficient capital
positions are screened
and excluded for capital
efficiency.
Systematic monitoring
of the overall portfolio
capital to stay within a
budget.
4. Capital stability
Dynamic asset
allocation based on
market views, to deliver
better returns
3. Capital screening
Diversification of
assets by risk, to
deliver better risk
outcomes
1. Dynamic asset allocation 2. Diversification
Optimal solution
Source: Schroders. For illustration purpose only
** Remove from final presentation **
1. Diversification by risk factors and not exposure Construct portfolio by grouping assets that are driven by similar risk factors
59
Source: Schroders, at 30 November 2016. For illustrative purposes only and subject to change
Slowdown Inflation Growth
Equities
Developed markets
− Asia Pacific ex-Japan
− Europe ex-UK
− Japan
− North America
− UK
Emerging markets
− Broad emerging
markets
Credit Spreads
Investment Grade
High Yield
Sovereign bonds
Developed markets
− Asia Pacific ex-Japan
− Europe ex-UK
− North America
− UK
Emerging markets
− Mexico
− Poland
Commodities
Inflation breakevens
Inflation linked vs
Nominal bonds
Investments that
perform best when
economic growth is
rising/positive
Investments that perform
best when economic
growth is
falling/negative
Investments that
perform best when
inflation is rising
Investments that are not
primarily linked to the
economic cycle
Alternative Risk Premia
Carry
Long higher-yielding assets,
short lower-yielding assets
− Long: BRL, RUB, INR
− Short: USD, EUR, SGD
Momentum
Exploit price momentum
− Growth sensitive currencies
− Trend-following strategies
Value
Long undervalued assets,
short overvalued assets
− FX
− Fixed Income
Size
Long small-cap stocks, short
large-cap stocks
** Remove from final presentation **
2. Dynamic asset allocation We actively tilt exposure to risk premia according to our market views
60
Source: Schroders, for illustrative purposes only
Balance risk
exposure across
portfolio
3 Risk management with volatility targets 1 Initial allocation by risk premia
Slowdown Alternative Risk Premia Inflation Growth
Build long-term
exposures
2 Asset allocation by value tilts
0
2
4
6
8
10
0
2
4
6
8
10
Reducing
exposure
to a factor
Reducing
the total
portfolio
risk
Ex-ante portfolio risk (%)
A
B
5.0%
13.6% 0.0% 0.2%
2.9%
-5.9%
15.6%
0%
10%
20%
30%
40%
50%
Inte
rest
rate
Eq
uity
Pro
pe
rty
Cre
dit
Cu
rre
ncy
Div
ers
ific
atio
n
To
tal
Unconstrained SCR Strategy, SCR ~ 32% Capital Constrained Strategy, SCR ~ 16%
3. Capital Screening We identify Solvency II capital-inefficient trades and exclude them
61
7.3%
23.6% 0.0% 0.2%
14.5%
-13.2%
32.4%
0%
10%
20%
30%
40%
50%
Inte
rest
rate
Eq
uity
Pro
pe
rty
Cre
dit
Cu
rre
ncy
Div
ers
ific
atio
n
To
tal
Reduction in equity
exposure
Reduced currency
exposure
Standard formula SCR Standard formula SCR
Source: Schroders, at 30 November 2016. For illustrative purpose only.
** Remove from final presentation **
4. Capital stability We systematically control Solvency II capital to max 20% (equities are 39%)
62
SCR screening
At portfolio
construction Systematic
monitoring of
SCR Reports for insurers
Rebalance
Portfolio
QRT Tripartite SCR
Source: Schroders. For illustration purpose only
** Remove from final presentation **
Growth
Slowdown
Inflation
Alternative
Risk Premia
Risk allocation (% of total portfolio risk)
Risk allocation
Model portfolio Positioning*
Source: Schroders, December 2016. *Positions and securities are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Current model
portfolio does not contain any active decisions. Portfolio holdings can change at any time. Totals may not sum due to rounding.
27%
14%
22%
37%
Model
portfolio
Risk premia
Growth 37%
Regional equities 37%
Slowdown 27%
Developed Market Government
bonds 27%
Inflation 22%
Commodities 18%
Inflation Breakevens 4%
Alternative Risk Premia 14%
Carry 6%
Cross-Asset Momentum 5%
Value 2%
Size 2%
Target Return LIBOR + 3%
63
** Remove from final presentation **
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50
70
90
110
130
150
170
190
210
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15 May 16
Schroder Capital Aware Backtest S&P 500 Total Return Index Schroder Multi Asset Fund
SCR Capital Aware Backtest (RHS) SCR Equity (RHS)
Model portfolio Simulated since inception performance
64
Source: Schroders, 31 October 2016. Performance shown above for the “Backtest” portfolio represents a simulated track record, optimised for the solvency capital ratio, using
weekly data, gross of fees and presented in Pound sterling. 1Schroders Strategic Beta Fund 2Inception date was 3 May 2006 for the Capital Aware Backtest and S&P 500 Total
Return Index. 3Volatility is unaudited, annualised and calculated using gross weekly returns. Past performance is not a guide to future performance and may not be repeated.
Please see the important disclosures at the end of the presentation.
Since
Inception
p.a.2
Since
Inception
Volatility p.a.3
Return
over risk
Max
Drawdown SCR Range
Return on
Capital
Schroder Capital Aware Backtest 4.4% 4.6% 0.9 -11.6% 17% to 19% 0.24
S&P 500 Total Return Index 7.0% 17.0% 0.4 -53.8% 39% 0.18
NAV SCR
1
Important Information:
The views and opinions contained herein are those of Schroder Multi-Asset, and may not necessarily represent views expressed or reflected
in other Schroders communications, strategies or funds.
This document 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 Ltd
(Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or
restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any
other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. 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 can go down as
well as up and investors may not get back the amount originally invested.
Schroder Strategic Beta Fund risk factors: The capital is not guaranteed. 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 rates rise and vice versa. The fund may hold indirect short exposure in
anticipation of a decline of prices of these exposures or increase of interest rate. 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. In order to access restricted markets, the fund
may invest in structured products. Should the counterparty default, the value of these structured products may be nil. 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. The Fund's operations may
depend on third parties in countries where operational oversight standards are less developed. Investments in money market instruments and deposits
with financial institutions may be subject to price fluctuation or default by the issuer. Some of the amounts deposited may not be returned to the fund. The
Fund may use derivatives, which may increase its volatility. Inflation linked debt securities should lead to higher returns as inflation climbs but, if yields
rise dramatically, their value may drop. Emerging equity markets may be more volatile than equity markets of well established economies. Investment
into foreign currencies entails exchange risks. A financial model may provide a technique to identify and manage the risks of the fund. The model's
assumptions, calibration and programming may not deliver the expected results.
The hypothetical results shown herein must be considered as no more than an approximate representation of the portfolio’s performance, not as
indicative of how it would have performed in the past. It is the result of statistical modelling, based on a number of assumptions and there are a number
of material limitations on the retroactive reconstruction of any performance results from performance records. For example, it does not take into account
any dealing costs or issues which would have affected a real investment's performance. This data is provided to you for information purposes only as at
todays date and should not be relied on to predict possible future performance.
Important information
65
The forecasts stated in the presentation 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. For the purposes of the Data Protection Act 1998, the data controller in respect of any
personal data you supply is Schroder Investment Management Limited (SIM). Personal information you supply may be processed for the purposes of
investment administration by the Schroders Group which may include the transfer of data outside of the European Economic Area. SIM may also use
such information for marketing activities unless you notify it otherwise in writing
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the
Financial Conduct Authority. For your security, communications may be taped or monitored.
66
Emerging Market Debt Is 2016 the beginning of
a post crisis era?
December 2016
Matthew Michael | Product Director – Emerging Market Debt and Commodities
December 2016 | For professional investors and advisers only. This material is not suitable for retail clients *Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation
Why Emerging Market Debt
68
Source: Schroders, at 31 March 2016. The information on this page is for illustrative purposes only and should not be viewed as a recommendation to buy/sell
Over 50 Countries, a world of opportunities
EMD fixed income universe Total universe by sector
LOCAL DEBT
84.5%
Corporate Debt
45.1%
Govt. Debt
39.4%
Govt. Debt
4.7%
Corporate Debt
10.8% EXTERNAL DEBT
15.5%
Emerging Market Debt TOTAL = US$18.2 trillion
EMD: 2016 – A Post Crisis Era?
69
Source: Bloomberg; Schroders , at 30 June 2016. Past performance is not a guide to future performance and may not be repeated
Stage 1
Post Crisis
Stage 2
Recovery
Stage 3
Euphoria
Stage 4
Crisis
Stage 1
Post Crisis
Macro adjustment, high
asset price volatility
Reforms and sound
fundamentals,
differentiation in asset
performance
Policy mistakes and
macro imbalances
Devaluation, emergency
rate hikes and credit
crisis. Panic selling
Macro
adjustment, high
asset price
volatility
1998 – 2001 2002 – 2009 2010 – 2012 2013 – 2015 2016 –
Return Vol Sharpe Return Vol Sharpe Return Vol Sharpe Return Vol Sharpe
GBI EM 11.23 11.83 0.80 8.29 14.24 0.65 -10.07 11.27 -0.85
ELMI+ 8.24 10.97 0.44 9.76 7.27 1.0 2.49 9.58 0.30 -5.59 5.70 -0.96
EMBI+ 9.86 19.21 0.24 11.58 9.81 0.97 12.96 6.73 1.95 -0.30 7.56 0.00
60
65
70
75
80
85
90
95
100
105
110
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-25%
-24%
-40%
The collapse in EM Currencies appears overdone JP Morgan EM Currency Index 2000 – 2016
70
Source: JP Morgan; Bloomberg, at 30 November 2016
Investment outlook Emerging Markets Fundamental Analysis
50
70
90
110
130
150
170
190
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
71
Source: Bloomberg; Schroders, at 22 September 2016
Investment outlook Country Analysis Fundamental Analysis
-44%
-35% -35%
REER: still at historically
depressed levels
South Africa: real effective exchange rate cheap and oversold
EM Local vs. EM External yields: highest, lowest and current
72
0
5
10
15
20
25
30
35
40
Arg
en
tin
a
Bra
zil
Co
lom
bia
Ind
on
esia
Ma
laysia
Me
xic
o
Nig
eria
Pa
nam
a
Pe
ru
Ph
ilip
pin
es
Po
land
Ru
ssia
So
uth
Afr
ica
Tu
rke
y
Ukra
ine
Ve
nezu
ela
Source: Schroders; Bloomberg; JP Morgan, at 31 October 2016
0
4
8
12
16
20
Bra
zil
Ch
ile B
roa
d
Ch
ina
Co
lom
bia
Hu
nga
ry
Ind
ia
Ind
on
esia
Ma
laysia
Me
xic
o
Pe
ru
Po
land
Ru
ssia
So
uth
Afr
ica
Th
aila
nd
Tu
rke
y
Sector Long term
Average
Local Bond Yield %
External Bond Yield %
Sector Long term
Average
Investment outlook Global Environment Valuations
50
60
70
80
90
100
110
1200
100
200
300
400
500
600
700
800
900
1,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
EMBI+ Spread Inverted Scale – LHS JPM EM Currency Spot Index – RHS
Spreads in 5 year range
73
Source: Schroders; Bloomberg, at 30 November 2016
Investment outlook
EM sovereign and corporate credits remain broadly unattractive External Debt Spread (EMBI+ Index) vs. EM Currencies (JPM EM Currency Spot Index)
EMBI+ Spread in bps JPM EM Currency Spot Index
Emerging Markets Fundamental Analysis
Investment outlook
74
For illustrative purposes only
Crisis brings change
India Indonesia Argentina Brazil South Africa
Prime Minister
N. Modi
President
J. Widodo
President
M. Macri President
D. Rousseff
President
J. Zuma
Emerging Markets Fundamental Analysis
Investment outlook
75
Source: Schroders; Thomson Datastream; Bank of Indonesia, at 31 August 2016
-20
-10
0
10
20
30
40
50
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
20
12
20
16
Indonesia – Back to external trade surplus Trade balance in $ billion – 12 month rolling sum
Crisis brings change
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
2
4
6
8
10
12
14
16
18
20
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
CPI yoy CB CPI Target
Indonesia – Inflation back to target
Country Analysis Fundamental Analysis
Investment outlook
76
Source: Schroders, at September 2016
Country Risk Score – September 2016
Global Environment Quantitative Analysis
-10
-8
-6
-4
-2
0
2
4
6
8
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3
Country Risk Score before and after crisis Score
Investment outlook
Source: Schroders; Thomson Datastream, at November 2016
77
Russia 98
Argentina 01 Uruguay 01 USA 08 Thailand 97
Ireland 10 Mexico 94 Estonia 08
Romania 08 Hungary 08
Spain 10 Greece 10
Years from/to Crisis
Global Environment Fundamental Analysis
Investment outlook
78
Source: Schroders, at September 2016
Country Analysis Fundamental Analysis
Brazil – Country Risk Score by Vulnerability Indicator (1980 – 2016)
Growth dynamics Sovereign External Liquidity Hot Money Indicator Banking System Ext. Liquidity
Competitiveness Credit Cycle Total Country Risk Score
Country Risk Scores
Investment outlook
Source: Schroders; Thomson Datastream
79
Indonesia Columbia
India Mexico
Global Environment Quantitative Analysis
Investment outlook
80
Source: Schroders, at 30 September 2016
EEMEA
Av EM
Latam
Asia
Hot Money Indicator – Average country score by region
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Emerging Markets Quantitative Analysis
Investment outlook
81
Source: Bloomberg; Datastream; Schroders, at August 2016
PBOC Total Asset Annual Growth (%) Key Central Banks Assets % GDP FX Reserves % M2
China: Forced quantitative tightening over?
Previous
banking crisis
5%
10%
15%
20%
25%
30%
Ja
n-9
6F
eb-9
7M
ar-
98
Ap
r-9
9M
ay-0
0Ju
n-0
1Ju
l-02
Au
g-0
3S
ep
-04
Oct-
05
No
v-0
6D
ec-0
7Ja
n-0
9F
eb-1
0M
ar-
11
Ap
r-1
2M
ay-1
3Ju
n-1
4Ju
l-15
Au
g-1
6
Reserves
coverage is
shrinking fast
?
Emerging Markets Fundamental Analysis
Role in portfolios
Low-risk or entry level EMD exposure
Complements EMD beta strategies
Absolute return; diversifies risk and enhances returns
A liquid alternative investment
A unique approach to EMD investing Well established process: focusing on risk-adjusted returns
82
Source: Schroders, at November 2016. For illustrative purposes
Investment approach
Broad investment universe in over 50 countries
Long-only, Absolute Return
No leverage or complicated derivatives
Simple but effective risk controls
Experienced, stable team unchanged for over 16 years
Objectives
1. No losses in any 12 month period
2. Maximise returns whilst achieving objective 1
EM External Debt
(EMBI+)
Schroder ISF EMD Absolute Return
3-year rolling correlations
Performance
Proven diversification: low correlation to other fixed income sectors
83
Source: JP Morgan; Bloomberg – 30 November 2016
Managing risk and Maximising Returns
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
2005 2007 2009 2011 2013 2015
US Treasuries Euro Government
0%
2%
4%
6%
8%
10%
12%
-1% 4% 9% 14%
Absolute
Return Funds
(Lipper)^
EM Currencies
(ELMI+ )
EM Local Debt
(GBI EM) †
Schroder ISF EMD
Absolute Return
Net*
An
nualis
ed R
etu
rn U
S$
*C share class NAV to NAV net of fees. **Absolute Return † GBI – EM inception July 2001 ^ Based on average monthly returns of peer group
Risks associated with Emerging Market Debt: This document contains terms for discussion purposes only and is not intended to provide the sole
basis for evaluation of the instruments described. Emerging Market Debt investment carries significant risks and should only be considered by
sophisticated investors who understand the nature of these risks. Principal Risks: The strategy will be affected by the investment decisions,
techniques, and risk analyses of the strategy’s investment team, and there is no guarantee that the strategy will achieve its investment objective.
The values of the investments held by the strategy may fluctuate in response to actual or perceived issuer, political, market, and economic factors
influencing the financial markets generally, or relevant industries or sectors within them. Fluctuations may be more pronounced if the strategy
invests substantially in one country or group of countries or corporate issuers. Other principal risks of investing in an EMD strategy include:
Portfolio Turnover, Emerging Market sovereign and corporate issuers, Foreign Investment, Currency, Interest Rate, Credit/High-Yield, Non-
Diversification, Valuation Risk, Inflation/Deflation Risk, Derivatives, Liquidity Risk and Convertible Securities. Exchange rate changes may cause
the value of any foreign investments to rise or fall.
The views and forecasts contained herein are those of Schroders Emerging Market Debt team and are subject to change. 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.
The opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized.
Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as
up and is not guaranteed.
The ratings of Standard & Poor's Corporation (S&P) and Moody's Investor Service, Inc. represent these companies' opinions as to the quality of
the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The quality classification of bonds by rating
is based on the higher credit ratings of either Moody's or S&P. For example, a bond rated A1/AA- by Moody's and S&P, respectively, would be
included in the double A quality tier.
Important information
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Important Information
This presentation 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 presentation 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 presentation 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.
Forecasts
The forecasts stated in the presentation 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.
The Company qualifies as a Société d’Investissement à Caiptal Variable (“SICAV”) and as an alternative investment fund within the meaning of
article 1(39) of the 2013 Law. The distribution and promotion of the Company's units is restricted for the purpose of the 2013 Law, to
professional investors who are supposed to have sufficient experience to judge themselves the concept of risk-spreading and the information
they need to form their opinion. Accordingly, this material is targeted to institutional; professional; existing investors and newly accepted clients
of the Schroder Group where reasonable steps have been taken to ensure that investment in the Company is suitable. This material should not
be relied upon by persons of any other description. This document may not be distributed to any unauthorised persons. For your security,
communications may be taped or monitored.
Important information
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Important information
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Risk Considerations
The capital is not guaranteed.
In order to access restricted markets, the fund may invest in structured products. Should the counterparty default, the value of these structured
products may be nil. 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 in money market instruments and deposits with financial institutions
may be subject to price fluctuation or default by the issuer. Some of the amounts deposited may not be returned to the fund. Currency
derivative instruments are subject to the default risk of the counterparty. The unrealised gain and some of the desired market exposure may be
lost. 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. Emerging markets will generally be subject to greater political, legal,
counterparty and operational risk.
Third Party Disclaimer
Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the
data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall
have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply
to the third party data.
FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of London Stock Exchange Plc and The Financial Times Limited
and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors.
Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No
further distribution of FTSE Data is permitted without FTSE’s express written consent.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England.
Authorised and regulated by the Financial Conduct Authority.