Building and measuring outcome-oriented investment strategies

44 Pages·2016·2.15 MB·English

Issue 1 | 2016 For proFeSSIonAL InveSTorS or ADvISerS onLy
Building and
measuring
outcome-oriented
investment strategies
funds
Schroder GAIA BlueTrend:
A trend-following strategy
from Leda Braga
Markets
Interest rates:
are investors in for a nasty shock?
special features
Is sugar the next tobacco?
lesley-ann Morgan
Global Head of Defined Contribution
04 06–11 16–17
24–25 34–37 42–43
Contents scHrOders’ neWs 04__ news
service 05__Who we are
features 06__Building and measuring outcome-oriented
investment strategies
investMent ideas 12__Why focusing on risk can result
in better wealth preservation
funds 16__Bonds in the low-interest environment:
Investing with conviction
18__Schroders FundFocus: Schroder GAIA BlueTrend
21__Top performers
22__Q & A with Jessica Ground
deMOGrapHics cOrner 24__China – too expensive for two
Markets 26__Market overview
28__Interest rates: are investors in for a nasty shock?
special features 32__incomeIQ
34__Is sugar the next tobacco?
A look at the threats to the food industry
MiscellaneOus 38__Book recommendation
40__From the UK:
Darts fever hits one hundred and eighty –
and not just in the UK
42__History of Schroders: 1974–2000
02 SCHroDerS experT 1 | 2016
eDITorIAL
Same procedure
as every year?
If you have been making progress for more than Another very new development is our first trend-
210 years, a new year may not seem to be anything following strategy. The UCITS-compliant GAIA
special at first sight. But making progress for more platform offers access to the Schroder GAIA
than 210 years also means never standing still and BlueTrend from Leda Braga. As one of the most
continually taking the crucial steps that will lead important hedge fund managers in the world, she
you to the top. And that only works if you give a very gives us insights into her extraordinary strategy in
wide berth to any ideas relating to following the the interview on page 18 .
same procedure as every year. This is what we do
Wishing you a good investment year with lots of
at Schroders – because innovation is one of the
positive innovation – and only one procedure that is
key practices that keep us at the very top, and will
the same as every year: our successful teamwork
continue to do so in 2016.
with you, which continues to make me proud and
In fact, you have probably already noticed our first happy in 2016.
new feature, as you are holding it in your hands. our
With warm regards,
Schroders expert magazine has a new look – fresh,
modern and designed in line with schroders.com/
nordics. Completely redesigning our website for all
locations around the world from a technical, visual
and content point of view was one of our key
innovations in the last year. one goal was to hone
the Schroders brand for you as a client and adviser
and to clearly differentiate us from our competitors.
ketil petersen,
numerous awards have already shown that we have Country Head
more than achieved this goal. nordic region
SCHroDerS experT 1 | 2016 03
SCHroDerS’ neWS
+ + + schroder isf eurO credit conviction fund volume exceeds 1 billion euros + + +
Less than two years to break the sound barrier: low-yielding, higher-rated bonds that can dilute the
schroder isf1 eurO credit conviction best value and act as a drag on yield and returns. The
(ISIn: LU0995119665) has passed the 1 billion euro fund can hold more off-benchmark investments –
milestone. portfolio Manager patrick such as high yield issuers and non-
vogel and his team focus on a small euro bonds (hedged to euro) – whilst
S selection of highly compelling themes; remaining an investment grade fund.
as with Schroder ISF eUro Corporate The combination of investment process
Bond. However, as the fund is measured innovation and the fund’s flexibility allows
W
against a BBB rated benchmark, it the european credit team to hunt for the
doesn’t have to hold so many of the best value.
E
1 Schroder International Selection Fund is referred to as Schroder ISF.
N
+ + + the trend is your friend + + +

Long-term returns of 10 to 15% per year – this is the The BlueTrend strategy has achieved outstanding
’ goal of the BlueTrend strategy, which investors can results since its launch in January 2004. Schroder
S
access on the GAIA UCITS platform. schroder Gaia GAIA BlueTrend covers 150 markets across various
Bluetrend is managed together with asset classes including equities,
R our partner, Systematica Investments. commodities, bonds and forex, and
The team led by Ceo Leda Braga, one tracks trends via long and short
of the most important and successful positions. It is suitable for investors
E
hedge fund managers in the world, has who seek above-average returns with
extensive expertise in trend-following a low correlation to the wider market.
D
strategies.
O
R
+ + + schroders builds on infrastructure financing + + +
H Building market-leading expertise and long-term Macroeconomic factors and changing regulatory
engagement in the asset class: these are the requirements are currently leading to an increasing
objectives for Schroders with its new business unit supply of infrastructure projects, which in turn is
C for infrastructure financing. In working towards these attracting demand from long-term institutional
goals, the newly appointed Head of Infrastructure investors. now is the right time for Schroders to offer
Finance, Charles Dupont, draws on extensive solutions to the specific needs of clients in this sector
S
experience with institutional investors, such as around the world.
pension funds and insurance companies.
+ + + consistent returns through innovative analysis + + +
schroder isf eurO credit absolute return, trends and analyse company business models.
was launched in December 2015 – aiming to bring The analysts identify which issuers should benefit
positive annual returns to investors in all market from the trends – and which may be negatively
conditions. The team led by patrick vogel, who affected.
heads the european bonds division, combines The team then implements this analysis with both
a proven top-down approach with innovative long and short positions, for consistent, high alpha
analysis. The objective here is to recognise global returns for investors.
04 SCHroDerS experT 1 | 2016
ServICe
Who we are
ketil petersen lars k. Jelgren
Country Head nordic region Head of Intermediary Sales, nordic
Direct phone: [phone] Direct phone: [phone]
Mobile: [phone] Mobile: [phone]
email: [email protected] email: [email protected]
senait asgede victor rozental
Institutional Sales Intermediary Sales
Direct phone: [phone] Direct phone: [phone]
email: [email protected] Mobile: [phone]
email: [email protected]
poul ahlmann anders nilsson
Institutional Sales Intermediary Sales
Direct phone: [phone] Direct phone: [phone]
[email protected] Mobile: [phone]
email: [email protected]
lykke Jensen Britt larsen
Chief operational officer Client executive
Direct phone: [phone] Direct phone: [phone]
Mobile: [phone] email: [email protected]
email: [email protected]
thalia vantzou luoma Marianne pedersen
Client executive Business Manager
Direct phone: [phone] Direct phone: [phone]
email: [email protected] email: [email protected]
visiting addresses
Store Strandstræde 21, 2nd Sveavägen 9, 15th
DK-1255 Copenhagen K Se-111 57 Stockholm
phone: [phone] phone: [phone]
Fax: [phone] Fax: [phone]
www.schroders.com/nordics www.schroders.com/nordics
publishing important information
information
This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund and
published by: Schroder GAIA (the “Companies”). nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.
Schroders Denmark Filial Subscriptions for shares of the Companies can only be made on the basis of their latest Key Investor Information Document and prospectus, together
af Schroder Investment with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from
Management Schroder Investment Management (Luxembourg) S.A. An investment in the Companies entails risks, which are fully described in the prospectus.
(Luxembourg) S.A. Store 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
Strandstræde 21, 2nd, investors may not get the amount originally invested.
DK-1255 Copenhagen Schroders has expressed its own views and opinions in this document and these may change.
This document is issued by Schroders Denmark, Store Strandstræde 21, 2nd Floor, DK-1255 Copenhagen. For your security, communications may
editor: be taped or monitored.
Lars K. Jelgren 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
copy deadline:
in connection with the third party data. The prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data.
16 november 2015
Graphics:
image credits
A. punkt, Heidelberg
A. punkt: 28/29, 35
fotolia: 16/17, 24/25, 26, 26/27, 41
gettyimages: 43
iStock: 12/13, 42/43
pa·picture alliance: 40/41
shutterstock: 6, 27
Schroders: except where stated.
SCHroDerS experT 1 | 2016 05
FeATUreS
Building and measuring
outcome-oriented
investment strategies
We are all faced with real-world investment
problems. These might be the need to
achieve adequate savings for retirement,
to generate income to cover living costs,
to meet the pension promises made
to employees, or simply to maintain
purchasing power over time. For
many years, however, there has
been a fundamental disconnection
between these problems and the
benchmark-related portfolios which
have been built to solve them ...
06 SCHroDerS experT 1 | 2016
FeATUreS
... The use of market indices as de facto proxies for the intended
risk exposures has allowed segmentation into convenient
building blocks and easier portfolio monitoring, but has also led
to differences between asset owners and their investment
managers in how success is defined.
By using real-world outcomes The likelihood of the successful
as the explicit target results for achievement of target outcomes
portfolios, investors can dispense depends on:
with these market-related proxies and
»
better align the success measures of t he reasonableness and consistency
their appointed managers with their own. of primary and secondary objectives
»
portfolios are judged on the delivery of t he extent of constraints imposed on
the outcome, rather than compared with the manager(s)
»
an abstract market measure (Figure 1). t he market environment experienced
These five target outcomes can be over the investor’s time horizon,
distilled into more specific objectives. including starting valuations, and
»
This article outlines a method to ensure t he manager’s ability to control
these objectives are realistic and outcomes through active management
achievable. But such targets do not decisions.
exist in isolation. As well as primary and
secondary objectives, investors also creating an outcome-oriented
have tolerance levels and investment framework
restrictions to consider  – it is the As the basis for our analysis, we created
combination and relative importance of an unbiased range of permutations of
these elements that define the portfolio’s five asset classes – US equities, global
shape. equities, US Treasury bonds, commodities uu
Figure 1: What’s the problem you’re trying to solve?
... I don’t want … I’d like … I’m … I need to … I need to
Investor’s
my assets growth but concerned make meet
perspective to lose not too about regular liabilities
value much risk inflation withdrawals
portfolio risk-
Wealth inflation risk
controlled income
perspective preservation protection mitigation
growth
Source: Schroders, for illustration only.
SCHroDerS experT 1 | 2016 07
FeATUreS
“By combining information about the medium-term market
environment with the actual long-term objectives, an intelligent
assessment can be made of the portfolio’s performance.”
uu and cash. rather than being random, long-term objectives, an intelligent p. a. objective was around 29%. For
these asset allocations attempt to assessment can be made of the a target real return of 3% p. a., the
replicate the full universe of possible portfolio’s performance. proportion of portfolios successful would
portfolios. By populating them with The remainder of this article is have been 44%. At a 7% p. a. real return
actual market data, we can then define a worked example of a risk-controlled target, the success rate falls to 18%. For
ranges of achievable outcomes, such as growth portfolio, demonstrating the an active manager, inflation +5% p. a.
returns, volatility, drawdowns, income- setting of realistic parameters and the seems to be a reasonable, if stretching,
generation or capital preservation. This use of our framework to monitor the objective in terms of achievability. The
demonstrates how outcomes change with outcomes. The main growth objective chart clearly shows, however, that there
asset class opportunities and over time, here is a typical specified portfolio will still be no guarantee of success, and
allowing us to identify realistic parameters return, often in absolute terms or in probably significant periods when the
for outcome-oriented portfolios. excess of a cash or an inflation measure. primary target is unrealistic.
Such a framework can be used to The secondary objective is the “risk- The secondary objective concerns
demonstrate how investors’ objectives controlled” part. Here again, definitions risk, the aim being to control it subject
and their constraints are inherently can vary, with risk being seen variously in to satisfying the primary objective. To
linked by showing, for example, the terms of loss tolerance, return variability/ analyse this, we looked at all the portfolios
returns achievable from portfolios smoothness or in measures like value at which achieved a real return greater than
within certain risk limits or with restricted risk. Figure 2 plots the range of return 5% p. a. in each period, and examined
capital allocations. This framework outcomes from our simulated portfolios their volatility levels (Figure 3).
can also be used as a monitoring tool over time. We also show a few real return of the 29% of portfolios which were
for outcome-oriented portfolios. By target levels. successful on the primary objective,
combining information about the medium- over the whole period, the proportion the average volatility was 8.7% p. a.
term market environment with the actual of portfolios exceeding an inflation +5% However, Figure 3 shows that the range
Figure 2: real returns over Five-year periods are oFten impossible to achieve
rolling five–year returns, p. a. in %
20
15
10
5
0
–5
12/98 12/00 12/02 12/04 12/06 12/08 12/10 12/12 12/14
Five-year period ending
Interquartile range of simulated portfolios Inflation +3% target Inflation +5% target Inflation +7% target
Median
1001 simulated portfolios for each five-year period. Source: Bloomberg, Thomson reuters Datastream and Schroders.
Indices used are the S&p 500 Tr, US 10 year Treasuries, MSCI World, US 1 week LIBor and DJ AIG Commodity.
08 SCHroDerS experT 1 | 2016
FeATUreS
of volatilities can be quite wide. volatility
of more than around 12% p. a. might
be unacceptable, thereby failing the
secondary objective.
Monitoring an outcome-oriented
mandate
one of the difficulties in monitoring
outcome-oriented portfolios is that
the primary objective can often be an
impossible target to achieve in the short
term. In the absence of a market index
to use as a benchmark, we believe the
best approach is to use the same range
of simulated portfolios as a “peer group”
to help answer two key questions:
1. How achievable were the primary
and secondary objectives, given the
restrictions?
2. How well did the portfolio take
advantage of the opportunities
available? uu
Figure 3: achieving the primary objective may conFlict With the secondary objective
proportion of successful portfolios in % volatility of successful portfolios, p. a. in %
100 20
90 Limited success 18
Wide volatility range
80 16
70 14
60 12
50 10
40 8
30 6
20 4
10 2
0 0
12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14
Five-year period ending
proportion of successful portfolios (LHS) Minimum to maximum volatility range (rHS)
Successful portfolios are defined as portfolios which have outperformed the inflation +5% p. a. target. 1001 simulated portfolios for
each five-year period. Source: Bloomberg, Thomson reuters Datastream and Schroders. Data for 5-year periods as described on
axis. Indices used are the S&p 500 Tr, US 10 year Treasuries, MSCI World, US 1 week LIBor and DJ AIG Commodity.
SCHroDerS experT 1 | 2016 09
FeATUreS
“It is better to aim for a real target and
narrowly miss it than to aim for the wrong
target and hit it precisely.”
uu By directly comparing results against the successful only 38% of the time. even delivers a  satisfactory return, this
primary objective, this gives a monitoring though the success rates were fairly strategy fails on the “risk-controlled”
dashboard that can help in making similar, the experienced volatility from front. By the same token, the investor
more accurate interim assessments of both strategies was very different. The would also realise that the 60/40
whether the portfolio is on track. equity strategy’s volatility peaked at over strategy has more success in controlling
In our next example, we use two 20% p. a., while the 60 / 40 strategy only risks than pure equity, but only a mixed
portfolios for illustration: a pure equity peaked at around 11% p. a. ability to use the opportunities available
strategy and a 60% equity, 40% bonds An active, outcome-oriented manager to generate real returns.
strategy. Clearly, neither is explicitly an taking portfolio decisions with the
outcome-oriented portfolio, although primary and secondary objectives in
a 60/40 strategy is often considered mind would be expected, if successful, to
a balanced growth approach. deliver mainly green points in the green
Looking first at the long-term quadrant of the chart. on observing
outcomes, Figure 4 shows how these the results unfolding, an investor could
portfolios performed on a rolling five-year take action in the same manner as
basis, as compared with the simulated they would take on seeing a benchmark-
peer group and primary objective. The relative manager outperforming or
range shown is the same as in Figure 2 underperforming the relevant index.
earlier. So, by using our dashboard approach
Both static strategies generally fell in this example, an investor using the
short of the primary objective: the pure pure equity portfolio to target inflation
equity strategy was successful only 40% +5% p. a. growth would quickly
of the time and the 60/40 strategy was conclude that, while it sometimes
Figure 4: static strategies struggle For real-World consistency
rolling five- year returns in %
30
25
outperforms sometimes …
20
… but severely
15 underperforms at others
10
5
0
–5
–10
12/98 12/00 12/02 12/04 12/06 12/08 12/10 12/12 12/14
Five-year period ending
Interquartile range of simulated portfolios Inflation +5% pure equity strategy 60/40 strategy
The pure equity strategy consists of 50% US equities and 50% global equities, while the 60/40 strategy consists of 30% US equities,
30% global equities and 40% US Treasuries. 1001 simulated portfolios for each five-year period. Source: Bloomberg, Thomson
reuters Datastream and Schroders. Indices used are the S&p 500 Tr, US 10 year Treasuries, MSCI World, US 1 week LIBor and
DJ AIG Commodity.
10 SCHroDerS experT 1 | 2016