Schroders PLC · LSE:SDR
Schroders — Conference Presentation (July 2015)
27 slides from Schroders's conference presentation, July 2015
Slide 1: Schroders fixed income Madrid July 2015
Schroders fixed income Madrid July 2015 Alan Cauberghs, CFA Senior Investment Director, Fixed Income For professional investors only. This material is not suitable for retail clients
Slide 2: Introduction
Introduction A brave new world – did we think this through? Quantitative easing (“QE”) – the right response? Structural market changes – liquidity gap Unintended consequences – a brave new world Outlook – what to expect going forward Source: Schroders. 2
Slide 3: Quantitative easing
j -¥ — Quantitative easing #8 Schroders
Slide 4: Quantitative easing
Quantitative easing Stimulating real economy? Source: BBC, The Telegraph, The Guardian 4
Slide 5: Globalisation coincided with an era of excess
Globalisation coincided with an era of excess The hangover decreases economic / market correlations 18% 16% 14% 12% 10% 8% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Advanced economy trade/advanced economy GDP (%) Source: Schroders, Thomson Reuters Data
Slide 6: QE has driven demand
06/07/2015 09:37:21 QE has driven demand …but largest buyer will step out of the market one day Gov’t real yields drop approx. 0.5% IG corporate real yields finally negative Eurozone equities outperforming US US 10Y Real Gov’t – Germany 10Y Real Gov’t US 10Y Real Gov’t – Germany 10Y Real Gov’t Stoxx
Slide 7: Inflation is low but it is a lagging indicator of activity
Inflation is low but it is a lagging indicator of activity And the US is a relatively closed economy Inflation is a lagging indicator You can’t export disinflation to a closed economy 120 6 3 100 4 2,5 80 2 2 60 0 1,5 -2 40 1 -4 20 -6 0,5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Slide 8: “Safe haven” assets are no longer safe
“Safe haven” assets are no longer safe Future returns being brought forward – tomorrow’s lunch has been eaten Some 10 year government bond yields at all time Unprecedented % of outstanding government lows bonds have negative yields 3,5 90% 3,0 80% 70% 2,5 60% 2,0 50% 1,5 40% 30% 1,0 20% 0,5 10% 0,0
Slide 9: Structural market changes
om Structural market > an changes #8 Schroders
Slide 10: Structural market changes
Structural market changes Regulations with severe investment implications Basel III – stricter capital requirements for banks Mifid II – increasing market transparency (pre- and post trade transparency) EMIR and MIFIR – trading of derivatives on organised venues Volcker rule – fails to draw
Slide 11: Market liquidity is structurally challenged
Market liquidity is structurally challenged Regulatory forces are impairing credit markets Corporate bonds held in inventory by dealers US investment grade and high yield bond market US primary dealers corporate bond, $bn1 Full market value, $bn2 250 7.000 IG + HY CP + RMBS + CMBS 6.000 200 IG IG HY
Slide 12: Central banks still control the bond market
06/07/2015 09:37:21 Central banks still control the bond market The PBoC and BoJ are keeping up stimulus despite Fed pulling back Central banks still expanding balance sheets Big holders of sovereigns, pushing down yields Total central bank assets, $tn Central banks’ holdings of government securitie
Slide 13: Unintended consequences
Ss Unintended > a consequences #8 Schroders
Slide 14: 1. Increased regional divergence
1. Increased regional divergence The world is not homogenous and the Fed will soon expose this fact Output gap (% GDP) Convergence Convergence Divergence Source: Schroders; Thomson Reuters Datastream. As at 7 May 2015. Data projected to 31 December 2014. 14
Slide 15: 1. Increased regional divergence
1. Increased regional divergence Economies are at different points in the Inflation divergence will become a more normal cycle phenomenon Unemployment rates % Consensus forecasts consumer prices (%YoY, mean) 14 6 12 5 10 4 8 3 6 2 4 1 2 0 0 -1 ene-06 jul-06 ene-07 jul-07 ene-08 jul-08 ene-09 jul-09
Slide 16: 1. Increased regional divergence
1. Increased regional divergence Large currency moves… …and government bond yield divergences 0,9 130 2 1 120 1,5 1,1 110 1 1,2 100 1,3 0,5 90 1,4 0 80 1,5 -0,5 70 1,6 -1 1,7 60 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 US - Germany
Slide 17: 2. Increase in cyclicality
2. Increase in cyclicality Higher probability of policy errors Monetary policy is currently extremely Previous Fed hiking cycles have seen the FOMC accommodative in the US hike faster than first expected CBO forecast 1y % change 4 1,6 1,4 3,5 1,2 3 1 2,5 0,8 2 0,6 1,5 0,4 1 0,2 mar-05 mar-90 nov-91
Slide 18: 2. Increase in cyclicality
2. Increase in cyclicality No longer pro-cyclical policy UK nominal GDP vs. base rate US nominal GDP vs. Fed funds 20 20 15 15 10 10 5 5 0 0 -5 -5 jun 90 jun 90 jun 80 jun 82 jun 84 jun 86 jun 88 jun 92 jun 94 jun 96 jun 98 jun 00 jun 02 jun 04 jun 06 jun 08 jun 10 jun 12 jun 14 jun 80 jun 82 jun 84
Slide 19: 3. Increase in volatility
3. Increase in volatility Does today’s marketplace reward investors for taking risk - alpha vs beta Interest Rate volatility Currency volatility 300 25 250 20 200 15 150 10 100 50 5 feb 06 feb 07 feb 08 feb 09 feb 10 feb 11 feb 12 feb 13 feb 14 feb 15 feb 06 feb 07 feb 08 feb 09 feb 10 feb 11 feb 12
Slide 20: 4. Asset misallocation
06/07/201 5 09:37:21 4. Asset misallocation Returns in June 2013 Emerging Emerging UK IG Euro IG Euro HY UK Gilts Market Market Euro Corporate Corporate Corporate Corporate Sovereign Government -2.40 -4.15 -1.57 -2.03 -4.78 -5.03 -1.48 Source: Schroders; as at 27 February 2015. For illustrative purp
Slide 21: Outlook
= Schroders
Slide 22: Wrong policy, unintended consequences
Wrong policy, unintended consequences What next? Lower asset returns Higher cyclicality Regional divergence Lower terminal rate Source: Schroders. 22
Slide 23: Wrong policy, unintended consequences: where to invest?
Wrong policy, unintended consequences Where to invest? Opportunity set is again global Beta returns have been brought forward, so only alpha left Policy mistakes will come to the surface – too little, too late – Unconstrained strategies, low correlation with beta: SISF Strategic Bonds – Potent
Slide 24: Schroder ISF Strategic Bond
Schroder ISF Strategic Bond Schroder International Selection Fund is referred to as Schroder ISF
Slide 25: Schroder ISF Strategic Bond
Schroder ISF Strategic Bond Clear diversification benefits to other betas Barclays Global Dow Jones Schroder ISF Aggregate Barclays Global S&P 500 Total Credit Suisse HFRI Macro Strategic Treasuries Aggregate Return Index Hedge Fund (Total) Index Bond* Total Return Credit Index Index Index Schroder
Slide 26: Schroder ISF Strategic Bond
Schroder ISF Strategic Bond Portfolio characteristics as at 30 June 2015 Asset class (% market value) Country of risk (CTD years) 120,0 2,0 98,9 100,0 1,2 100,0 1,5 80,0 1,0 60,0 43,3 0,3 0,2 0,3 0,5 0,2 0,1 40,0 16,6 19,8 0,0 6,7 12,5 20,0 2,8 -0,5 0,0 -0,4 -1,0 -20,0 -0,8 -40,0 -1,5 -60,0 -2,0 -53
Slide 27: Important information
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 se