Monthly Newsletter

Issued in September 2016
For Professional Investors and Advisers Only
Monthly Newsletter
Schroder ISF* Global Conservative Convertible Bond
Covering August 2016
Performance %**
Schroder ISF Global
Conservative
Convertible Bond
USD
EUR
CHF
Portfolio overview
August
2016
3
Months
6
Months
1
Year
I class
1.04%
1.80%
4.20%
3.40%
A class
0.90%
1.43%
3.44%
1.89%
BM
1.17%
1.96%
4.88%
2.14%
I class
0.90%
1.44%
3.53%
2.51%
A class
0.77%
1.07%
2.77%
1.03%
BM
1.09%
1.62%
4.25%
1.29%
I class
0.89%
1.31%
3.31%
1.95%
A class
0.76%
0.93%
2.55%
0.48%
BM
1.04%
1.52%
4.04%
0.77%
Benchmark: Thomson Reuters Global Focus Investment Grade USD
Hedged (EUR/CHF)
Source: Bloomberg/Schroders as at 31/08/2016.
Market overview
The month of August was amongst the calmest
periods for stock markets in decades. The Chicago
Volatility Index (VIX), as a barometer of market
unpredictability and anticipated volatility, marked
lows of between 11% and 13%. At the start of the
investment year, we saw VIX levels of more than
28%. But from that bad start, markets such as the
NASDAQ have rallied by up to 20%. After a very
strong July, August was another positive month for
equity markets.
In the US, all major equity markets were up. The
Dow Jones Industrial Average ended the month
with a gain of 0.3%. The S&P 500 Index gained
0.1% while the NASDAQ finished 1.2% higher.
In Europe the Eurostoxx gained 1.2%, mostly
driven by German companies, with the Dax up
2.5%. The Swiss SMI and Italy’s MIB finished the
month up 0.9% and 0.6% respectively, while
France’ CAC ended the month slightly down.
In Asia, Hong Kong and China saw the biggest
advances, with the Hang Seng gaining 5.2% and
the CSI up 4.1%.
Japan’s Nikkei benefitted from hopes of another
round of central bank activity and rose by 2%.
Other Asian markets finished the month positively.
The overall global MSCI finished the month with a
slight gain of 0.4% and conservative convertible
bonds outperformed global equities. Schroder ISF
Global Conservative Convertible Bond performed
in line with its benchmark.
We remain underweight in terms of equity
exposure in order to ensure above-average
protection for potential equity set-backs. At the end
of August, the equity exposure in the fund stood at
28.5% while its reference index was at 34.5%. In
terms of credit exposure we are in line with our
investment grade benchmark.
Our regional positioning has remained constant.
We continue with a slight risk overweight position
in Japan and Asia while being under-exposed to
Europe and the US. At a sector level, we remain
positive on materials, and have also entered a
small overweight in telecoms. Consistent with the
last few months, we continue to be strongly
underweight financials.
The primary market for convertible bonds was very
active in August as nearly $10 billion of new paper
came to the market. The last few trading days saw
a flurry of activity. We participated in several new
issues, such as Suntec REIT, listed in Singapore.
Our models indicate that investment grade,
conservative convertible bonds remain fair valued.
Implied volatility, as a typical measure of the price
for the conversion right remains low at 27% for the
Thomson Reuters Global Focus Investment Grade.
The fund’s running yield fell slightly to 0.5%. The
portfolio’s bond floor stands at a relatively high
level of 89% while the overall credit rating of the
fund remains A.
Outlook and strategy
August was a calm month for equity markets, with
some equity indices pushing a bit higher and the
percentage of global bonds yielding negative rates
rising once more. This could be the proverbial calm
before the storm, but does not make us change our
middle-term outlook. Central banks are still at the
helm of markets, be it bonds, equities,
commodities or foreign exchange. Over the years
market participants have learned not to fight
central banks and the risk rewards of this strategy
have certainly paid out.
However, lax central bank policy will not alone be
able to cover the world’s myriad problems.
Germany’s leading economic Ifo index spells bad
news and in August fell to its lowest value since
February this year. The IMF has stated that
France’s real effective exchange rate should be
9% cheaper, a full 16% against Germany.
*Schroder International Selection Fund is referred to as Schroder ISF
**EUR hedged, CHF hedged and USD A and I share classes shown bid to bid as at 31 August 2016, Source: Bloomberg. Portfolio data
sourced from Schroders (unaudited). All data as at 31 August 2016 excludes derivative positions.
Issued in September 2016
Further polls in France and other European
countries may come up in order to regain
competitiveness outside the economic union.
Furthermore, Italy has been back in the headlines
with its ongoing banking crisis, stemming from
significant non-performing loans and demand for
re-capitalisation. On the political front, Spain is still
negotiating to find a new government, Italy will hold
a referendum on constitutional reforms which may
fragment the government, and of course there is
the presidential election in the US.
The current budget deficit in the US is a full 5%
and corporate profits are coming under pressure.
Economic demand still does not live up to the
Federal Reserve’s expectations and Janet Yellen
is already searching deeper in the monetary toolbox, stating that “future policy makers may wish to
explore the possibility of a broader range of
assets”. This brings us to Japan, where the Bank
of Japan is already the biggest shareholder in 55
Nikkei companies and the count is rising.
For Professional Investors and Advisers Only
So what keeps us invested in convertible bonds?
All the above findings are shared market
consensus, and overall investment sentiment
seems negative. Investors retain cash and
negative yielding bond positions in order to buy on
the next dip. This is positive news, and we will
continue to position our strategies according to
their long-term objectives.
Schroder ISF Global Conservative Convertible
Bond will remain defensive against the benchmark
in equity, and in line in terms of credit exposure.
We somewhat optimistically believe that the glass
is more “half-full” than “half-empty”. As always, this
advice is much easier to give to investors in
convertible bonds, with the in-built safety net of a
bond floor. Convertible participation in the equity
market via a long term option, paired with strong
credit selection, continues to provide investors in
convertible bonds a good mix of equity exposure
and safety.
Taking into account the 20% rise in NASDAQ since
the February lows, combined with an unnatural
calm on equity markets, this leaves us with a
dangerous situation for markets. It feels as if
investors, in their search for yield, could find
themselves on thin ice.
*Schroder International Selection Fund is referred to as Schroder ISF
**EUR hedged, CHF hedged and USD A and I share classes shown bid to bid as at 31 August 2016, Source: Bloomberg. Portfolio data
sourced from Schroders (unaudited). All data as at 31 August 2016 excludes derivative positions.
Issued in September 2016
For Professional Investors and Advisers Only
Fund Data
Fund data as at 31 August 2016***
Team
Portfolio managers
Regional Allocation
Dr. Peter Reinmuth
Stefan Krause
Size & Holdings
Fund size in base
currency (USD)
151.6m
Number of issues
77
Portfolio
Index
Europe
60.62%
68.49%
Asia
9.25%
6.51%
Japan
11.14%
3.99%
Americas
14.20%
17.39%
Others
2.25%
3.62%
Cash
2.54%
0.00%
Portfolio
Index
Consumer
Discretionary
15.06%
16.42%
Consumer Staples
2.36%
1.37%
Energy
9.35%
9.50%
Financials
15.15%
15.42%
Health Care
3.88%
2.85%
Industrials
18.34%
22.10%
Information
Technology
7.18%
12.12%
Materials
3.86%
1.51%
Others
0.00%
0.00%
Telecommunication
Services
11.72%
9.51%
Utilities
10.56%
9.21%
Cash
2.54%
0.00%
Portfolio Statistics****
Yield
0.47%
Sector Allocation
Effective Duration
2.69 years
Equity Sensitivity
28.50%
Delta
Bond Floor
Average Rating
Credit Spread
0.37
89.35%
A98 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.
*Schroder International Selection Fund is referred to as Schroder ISF
**EUR hedged, CHF hedged and USD A and I share classes shown bid to bid as at 31 August 2016, Source: Bloomberg. Portfolio data
sourced from Schroders (unaudited). All data as at 31 August 2016 excludes derivative positions.
Issued in September 2016
For Professional Investors and Advisers Only
Credit Rating
AAA
AA
1.20%
0.28%
44.45%
44.06%
CCC and
below
24.77%
56.26%
2040%
47.57%
49.95%
54.46%
BBB
B
28.30%
0-20%
1.44%
1.20%
A
BB
Equity Sensitivity
2.97%
0.00%
0.00%
0.00%
0.00%
0.00%
12.35%
4060%
>60%
17.52%
3.09%
10.13%
Schroder ISF Global Conservative Convertible Bond
Schroder ISF Global Conservative Convertible Bond
Thomson Reuters Global Focus Investment Grade USD
Hedged
Thomson Reuters Global Focus Investment Grade USD
Hedged
Source: Schroders as at 31/08/2016.
Top Ten Issues
Weight
Sector
Koninklijke KPN NV / America Movil 2020
5.06%
Telecommunication Services
Total 2022
4.43%
Energy
Priceline Group 2021
3.50%
Consumer Discretionary
Dassault Aviation / Airbus
3.10%
Industrials
Intel 2035
3.09%
Information Technology
Telefonica 2021
2.95%
Telecommunication Services
Vodafone 2020
2.60%
Telecommunication Services
Industrivarden
2.26%
Financials
DP World 2024
2.25%
Industrials
Steinhoff 2023
2.22%
Consumer Discretionary
Source: Schroders as at 31/08/2016.
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
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