Schroders Plc · LSE:SDR
Schroders — Investor Presentation (November 2024)
42 slides from Schroders's investor presentation, November 2024
Slide 1: Schroders Defensive Overlay Portfolios
Schroders Defensive Overlay Portfolios Risk Managed Investments November 2024 Marketing material
Slide 2: Schroders proposes custom Defensive Overlay Portfolios
Schroders is pleased to be able to propose custom Defensive Overlay Portfolios tailored to the downside protection objectives of clients.
Slide 3: Introduction: Summary
Introduction Summary Generating downside convexity at reasonable cost 1 Option based hedges may be too expensive to implement strategically. Dynamic strategies may provide a more effective hedge 2 But the Liquid Alternatives & ARP strategy universe is large and diverse. Downside diversification 3 Dr
Slide 4: Introduction: Correlation Regimes
Introduction Correlation Regimes Correlations vary with market regimes and market structure changes. Defensive overlay portfolios are built using assets, or strategies, that exhibit strong negative correlations with underlying portfolios during stressed market regimes whilst ideally maintaining a mo
Slide 5: Introduction: Macro Factor Analysis
Introduction Macro Factor Analysis The sensitivity of an underlying portfolio to a variety of macroeconomic ‘factors’ that may drive, or result from, an economic shock may be analysed in order to design a defensive overlay portfolio that is effective across a broad range of tail events. 60/40 Portfo
Slide 6: Modelling underlying portfolios
Introduction Modelling underlying portfolios The underlying portfolio is modelled in order to construct and size the optimal defensive overlay portfolio. 100% Equity 85% Equity & 15% Fixed Income 70% Equity & 30% Fixed Income 60% Equity & 40% Fixed Income 50% Equity & 50% Fixed Income 35% Equity & 6
Slide 7: Traditional rolling put protection
Introduction Traditional rolling put protection Traditional rolling put protection may provide good convexity during steep drawdowns but at a high cost of carry. Can we structure a better defensive overlay portfolio that combines good reactivity and convexity with a better cost of carry? Historical
Slide 8: A Historical Lens
A Historical Lens Drawdown events of recent history
Slide 9: Drawdown events are not homogenous
Historical Drawdown Events Drawdown events are not homogenous An analysis of historical drawdown events shows that they have varied in cause, duration and magnitude. The defensive overlay portfolio is designed to be effective over as many such events and scenarios as possible. Historical Tail & Draw
Slide 10: Historical performance of traditional hedges vs SPX
Historical Drawdown Events Historical performance of traditional hedges vs SPX Those assets that have historically demonstrated the most reactivity, consistency, and downside convexity have also exhibited a negative carry. The defensive overlay portfolio is designed with both reactivity and cost of
Slide 11: Historical correlations
Historical Drawdown Events Historical correlations Correlations change according to macroeconomic regimes and over time as market structure changes. A defensive overlay portfolio requires ongoing monitoring and management to ensure downside consistency and convexity is maintained. Historical Rolling
Slide 12: Put Option Hedges: Historical Simulated Performance
Put Option Hedges Historical Simulated Performance A rolling put option structure has historically offered good downside convexity and consistency. The distribution of returns conditioned on the equity market is well defined which gives a good level of visibility over outcomes should a drawdown even
Slide 13: Historical equity volatility hedge performance
Equity Volatility Hedge Historical equity volatility hedge performance Equity volatility has also historically acted as an effective tail risk hedge, offering excellent convexity. Market structure changes over recent years, however, has impacted its efficacy and derivative market expertise is requir
Slide 14: Maintaining a defensive overlay portfolio must be cost effective
Strategy Cost of Carry Maintaining a defensive overlay portfolio must be cost effective Those assets and strategies that exhibit strong convexity and consistency on the downside come with an associated cost of carry that must be factored in when building a defensive overlay portfolio. Historical Car
Slide 15: Summary: History tells us that
Summary History tells us that…. Drawdown events vary in cause, impact, duration, and magnitude. 1 An effective defensive overlay portfolio should be able to cope with the majority of unforeseen events Correlations change over time. 2 As macroeconomic regimes and market structure changes, hedges may
Slide 16: Investment Process & Portfolio Construction
Investment Process & Portfolio Construction Building an effective defensive overlay portfolio
Slide 17: Alternative risk premia
Liquid Alternatives and Alternative Risk Premia Alternative risk premia A defensive overlay portfolio may be comprised of individual dynamic defensive strategies. Alternative Risk Premia (ARP) may be categorized into 3 high level buckets where a premia or return stream may be attributable to one or
Slide 18: Defining defensive strategy performance metrics: Market Environments
Dynamic Defensive Strategies Defining defensive strategy performance metrics: Market Environments Defensive overlay portfolio component strategies and the overall portfolio are evaluated based on their performance in different market environments defined by the historical performance of the underlyi
Slide 19: Defining hedge performance metrics
Quantifying Defensive Overlay Portfolio Performance Defining hedge performance metrics Defensive Overlay Portfolio components are assessed across four specific metrics. Metrics Downside Sensitivity Downside Convexity Downside Consistency Carry Definition Performance During Down Relative Out-Performa
Slide 20: Choosing individual defensive strategies
Dynamic Defensive Strategies Choosing individual defensive strategies In addition to traditional hedge strategies such as rolling put options, we may include dynamic defensive strategies that seek to generate the required downside convexity at an attractive cost of carry. A truly diversified Defensi
Slide 21: Defensive overlay portfolio constituent metrics
Dynamic Defensive Strategies Defensive overlay portfolio constituent metrics The dynamic defensive strategies from the example portfolio have performed best in the bottom decile of MSCI World monthly returns historically. The individual strategies have been both effective downside hedges and carried
Slide 22: Historical Dynamic Defensive Strategy Performance
Historical Dynamic Defensive Strategy Performance Defensive overlay portfolio constituent metrics The dynamic defensive strategies chosen have historically exhibited good convexity during sell-off periods. Intraday Momentum Strategy Put Spread Strategy Dispersion Strategy Contractual Strategy Return
Slide 23: Historical Dynamic Defensive Strategy Performance: Metrics
Historical Dynamic Defensive Strategy Performance Defensive overlay portfolio constituent metrics Intraday Momentum Strategy Metrics Put Spread Strategy Metrics Dispersion Strategy Metrics Measure Measure Measure Rates Volatility Strategy Metrics Rates Curve Trend Strategy Metrics X-Asset Momentum S
Slide 24: Macroeconomic Factors: Sharpe Ratios Conditioned on Factor Quintile
Macro Factor Analysis Macroeconomic Factors: Sharpe Ratios Conditioned on Factor Quintile The conditional sharpe ratio of the underlying portfolio, calculated as the annualised return conditioned on each factor quintile divided by the unconditional volatility may give further clues with regards to m
Slide 25: Factor Analysis – Dynamic Defensive Strategies
Factor Analysis – Dynamic Defensive Strategies Realised Volatility Factor: Strategy Conditional Sharpe Ratios Low Vol High Vol Real GDP Growth Factor: Strategy Conditional Sharpe Ratios Low GDP High GDP Growth Growth Source: Schroders, Bloomberg. For illustration only. Performance shown is past perf
Slide 26: Allocating between the individual dynamic hedge strategies
Portfolio Construction Allocating between the individual dynamic hedge strategies Allocations between the individual dynamic hedge strategies are driven by the underlying portfolio composition, the expectation of performance during a drawdown event, cost of carry, and macro factor sensitivity consid
Slide 27: How to size the defensive overlay portfolio
Portfolio Construction How to size the defensive overlay portfolio to the underlying portfolio Defensive overlay portfolio sizing aims to achieve the optimal mix of expected risk adjusted return, positive skewness and cost of carry whilst minimising drawdown. Overall Portfolio Risk Adjusted Return O
Slide 28: Sizing targets improvement across risk and return metrics
Portfolio Construction How to size the defensive overlay portfolio to the underlying portfolio Defensive overlay portfolio sizing targets an improvement across all risk and return metrics Portfolio (60/40) Historical Return Distribution Portfolio (60/40) + 100% Defensive Overlay Portfolio Return Dis
Slide 29: Ongoing management of the defensive overlay portfolio
Portfolio Management Ongoing management of the defensive overlay portfolio An experienced portfolio management team manages the portfolio with two main areas of focus: 1 2 Expected Ongoing performance of assessment of cost individual dynamic of carry – the ‘Price defensive of Risk’. strategies, and
Slide 30: Cost of protection
Defensive Overlay Portfolios Cost of protection A diversified defensive overlay may be less expensive to hold strategically then a pure rolling put option strategy. Historical Simulated Timeseries: Rolling 90 Strike SPX Put Option Portfolio vs Rolling 90 Historical Simulated Timeseries: Example Schr
Slide 31: Historical simulated performance
Defensive Overlay Portfolios Historical simulated performance A diversified defensive overlay may be more effective during drawdown periods than a pure rolling put option strategy. Historical Rolling 3 Month Returns of Rolling 90 Strike SPX Put Options Historical Rolling 3 Month Returns of Theoretic
Slide 32: Example simulated historical drawdown performance
Historical Drawdown Events Example simulated historical drawdown performance Historical Simulated Drawdown Performance: Dynamic Defensive Strategies and Diversified Overlay Euro Debt US-China Inflation Strategy Name GFC China Crash China Crash II Covid Crisis Trade War Shock Dynamic Defensive Strate
Slide 33: Simulated historical performance
Defensive Overlay Portfolios Simulated historical performance Defensive overlay portfolios are tailored to each underlying portfolio. The hedges designed for portfolios with a higher allocation to equity have historically exhibited greater convexity but at a more significant cost of carry. Defensive
Slide 34: Key Points
Schroders Defensive Overlay Portfolios Key Points Diversified defensive overlay portfolios constructed from dynamic strategies 1 High degree of visibility of outcome during drawdown event. Macro factor approach 2 Designed to be effective across variety of macroeconomic regimes and event catalysts. C
Slide 35: Appendix
solutions Appendix
Slide 36: Macro Factor Analysis – Factor Clusters
Macro Factor Analysis – Factor Clusters Factor Clusters To assess strategy and hedge portfolio performance under different macroeconomic regimes, performance is analysed through the lens of different ‘Macro Factor’ clusters: 1. Risk-On-Risk-Off (RORO) Illiquidity Factor: Z-Score of the change in the
Slide 37: Macro Factor Analysis – RORO Cluster
Macro Factor Analysis – RORO Cluster Realised Volatility Factor The Realised Volatility Factor is constructed from the Z-Score of a monthly measure of S&P 500 volatility over a rolling 80 month window. Source: Bloomberg, Schroders. Data reflects hypothetical back-tested performance results from Dece
Slide 38: Macro Factor Analysis – Inflation Cluster
Macro Factor Analysis – Inflation Cluster Unanticipated Inflation Factor The Unanticipated Inflation Factor is constructed from the Z-Score of the monthly level of the Citi US Inflation Surprise Index over a rolling 80 month window. Source: Bloomberg, Schroders. Data reflects hypothetical back-teste
Slide 39: Biographies: Portfolio Management and Structuring Teams
Biographies Portfolio Management and Structuring Teams Marcus Durell Gordon Harpur Fakhreddine Chaabani Head of Equity Derivatives Investments RMI Trader RMI Structurer – Marcus leads the Index, FX and Equity Derivatives – Gordon is an equity derivatives specialist within – Fakhreddine is a Structur
Slide 40: Biographies: Solutions Team
Biographies Solutions Team Csaba Koppany James Horrex Sophie Martinec Head of RMI Solutions Management RMI Solutions Manager RMI Solutions Manager – Csaba leads the RMI solutions management team. – James is a Solutions Manager, based in London. – Sophie is a Solutions Manager, based in London. He jo
Slide 41: Risk Considerations
Risk Considerations Currency risk: The fund may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates. Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficien
Slide 42: Disclaimer
Disclaimer Important information This presentation contains indicative terms for discussion purposes only and is not intended to provide the sole basis for evaluation of the investment solutions described. The management of the portfolio may be/may have been delegated (including partial delegation)