Fixed Income – anything but! Presentation March 2014 Representing Schroders: David Burke – National Account Manager Schroder Investment Management Australia Limited ABN 22 000 443 274 Australian Financial Services Licence 226473 Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000
Disclaimer statement This presentation is intended solely for the information of Wholesale Investors as defined under the Corporations Act by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in any of the Schroder Funds may be made on an application form in the Fund’s Product Disclosure Statement available from Schroders. This presentat ion does not contain and should not be taken as containing any financial product advice or financial product recommendations. You agree not to pass on any credit rating and/or related research to a party who is not a Wholesale Client. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested. You should note that past performance is not a reliable indicator of future performance. Opinions constitute our judgement at the time of issue and are subject to change. For security reasons telephone calls may be taped. Investment guidelines represented are internal only and are subject to change without notice. Total returns are calculated using exit price to exit price, after fees and expenses, and assuming reinvestment of income. Gross returns are calculated using exit price to exit price and are gross of fees and expenses. The repayment of capital and performance in any of the detailed funds are not guaranteed by Schroders or any company in the Schroders Group. Third party data including MSCI data, is owned by the applicable third party identified in the presentation and is provided for your internal use only. Such data may not be reproduced or re-disseminated and may not be used to create any financial instruments or products or any indices. Such data is provided without any warranties of any kind. Neither the third party data owner nor any other party involved in the publication of this document can be held liable for any error. The terms of the third party’s specific disclaimers, if any, are set forth in the Important Information section at www.schroders.com.au 2
About Schroders One of the largest independent investment managers in the world Schroders’ offices* (Investment offices in orange) – Pure investment management Madrid Milan London Paris Amsterdam Edinburgh Beijing Rome Copenhagen Oxford Hong Kong Stockholm Frankfurt Chester Jakarta Zurich Geneva Mumbai – Size and experience of Schroders’ global network Bermuda Gibraltar Seoul Cayman Islands Guernsey Shanghai Mexico City Jersey Singapore New York Luxembourg Sydney Philadelphia Taipei – Long standing heritage Tokyo – Financial strength and stability Dubai Global funds under management: A$444.7 billion* Buenos Aires Australian business funds under management: A$47.1 billion** São Paulo Global fixed income funds under management: A$76.1 billion* Santiago Australian fixed income funds under management: A$6.9 billion** Here for the long term 3 * FUM pro forma as at 30 September 2013 **as at 31 January 2014.
Schroders’ Australian Fixed Income & Multi-Asset Team Experienced team well integrated with Schroders’ global/regional resources Simon Doyle Head of Australian Fixed Income & Multi Asset (26yrs/11yrs)* Simon Stevenson Stuart Gray Stuart Dear Kellie Wood Mihkel Kase Head of Strategy / Fund Fund Manager, Fixed Income Head of Credit Research / Fund Manager, Fixed Income Fund Manager, Fixed Income Manager (Multi-Asset) Fund Manager (Credit) (Core, Core Plus) (Core, Core Plus) (Credit, Core-Plus) (21yrs/6yrs)* (16yrs/2yr)* (16yrs/1yr)* (14yrs/7yrs)* (19yrs/11yrs)* Multi-Asset Fixed Income Portfolio Management Karen Chow Alicia Low David Zhou Investment Analyst, Multi- Assistant Fund Manager Senior Credit Analyst Asset (Core, Distribution) (15yrs/3yr)* (3yrs/1yr)* (4yrs/6yrs)* Peter Fullerton Senior Credit Analyst (14yrs/6yrs)* – Investment team of 11 in Australia – Average portfolio management team investment experience of 19 years Helen Mason Credit Analyst – Part of a well resourced global fixed income team of over 160 (3yr/8yrs)* Credit Research 4 Source: Schroders as of December 2013 4 *(years of industry experience / years with Schroders)
Schroders’ Philosophy & Approach to Fixed Income – Fixed Income is held for defensive reasons: Liquidity; capital preservation; liability management; and to diversify ‘equity’ risk. Asset Risk allocation management – Fixed income is a broad asset class. Utilising this breadth can significantly improve risk / return outcomes. Australian – We employ a top down approach to allocating risk Bonds (UBS Composite Bond Index) – Combined with active stock selection and an effective implementation platform Stock Alpha – Emphasis on downside risk. selection strategies – Aim to outperform the UBS Composite Bond Index by 1-1.5%p.a. before fees over the medium term 5
The benchmark is a guide But it lacks diversity and is not a low risk option UBS Composite Bond Index * UBS Composite Bond Index 4.25 9.0 8.0 4.00 Corporates, 14% 7.0 Duration (yrs) 3.75 Supra's & Cth Gov't , 6.0 Yield (%) Gov't 39% G'teed, 16% 5.0 3.50 Semi-Gov't, 4.0 30% 3.25 3.0 3.00 2.0 2007 2008 2009 2010 2011 2012 2013 2014 Index Duration Index Yield Dominated by government issuance Interest rate sensitivity has risen, with limited credit exposure but the reward for taking it has fallen Source: Datastream, UBS 6 * UBS Composite Index as at 31 January 2014. May note add up to 100 due to rounding
Are investors worrying about the wrong things? MoM Australian 10 Yr Government Bond Yields 1994: Bonds v Equities % Change (%) 12 8% 10 4% 8 6 0% 4 -4% 2 0 -8% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Bonds 1994 ASX 200 Acc 1994 In 1994 bonds returned -4.7%, while Australian equities returned -8.8% 7 Source: Datastream, Schroders
1994 hurt, but not as much as missing 1995, 1996 or 1997 UBS Composite Bond Index - Calendar Year Returns 20% 15% 10% 5% 0% -5% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ytd Source: Datastream, Schroders 8
The case for fixed income in a low yield world Beware Japan Japanese 10yr yield US 10yr yield, lagged 10yrs 9 8 7 6 Bond yield (%) 5 4 3 2 1 0 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Just because yields are low, doesn’t mean they can’t go lower Source: Bloomberg 9
Running the numbers: Beware duration – not fixed income Impact on bond returns of rising yields for different portfolio durations 15% 10% 5% 1 Year Return 0% 2yr Govt Bond -5% SFIF -10% UBS Composite -15% 10yr Govt Bond -20% 0 1 2 3 4 5 6 7 8 1% fall in yields over 1 yr 0% change in yields over 1 yr 1% rise in yields over 1 yr 2% rise in yields over 1 yr 3% rise in yields over 1 yr Source: Bloomberg/Schroders, Based on Australian CGS yield curve as at 31 January 2014 For SFIF and UBS Composite Bond Index , calculation is duration only and doesn't include offsets from other investments such as credit. 10 Source: Bloomberg
Market review and outlook 11
Value: Real yields and inflation expectations US Australia % % 5 5 4 4 3 3 2 2 1 1 0 0 Inflation Expectations Real Yield Inflation Expectations Real Yield -1 -1 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 Nominal Yield Nominal Yield 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Inflation expectations remain steady … real yields low Source: Datastream, Schroders. Nominal yields on 10 year government bonds. 12
Value: Government Bonds expensive in a structural context Breakdown of US Yields US 10Y Bond Yield % 20% 5 18% 4 16% 14% 3 12% 10% 2 8% 1 6% 4% 0 2% 0% -1 1900 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 2000 2002 2004 2006 2008 2010 2012 2014 Inflation Expectations Real Yield Source: GFD, Schroders 13
Value: Cross currents impacting spreads and the yield curve Spreads: Australian 10Y - US 10Y Yield Curve: Australian 10Y - 3Y % % 3.0 2.0 2.5 1.5 2.0 1.0 1.5 0.5 1.0 0.0 0.5 -0.5 0.0 -1.0 -0.5 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Source: Datastream, Schroders 14
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