Marketing material for professional investors or advisers only. Schroders Adviser Investment Forum October 2019 Jonathan Golan, Portfolio Manager Schroder Sterling Corporate Bond
Marketing material for professional investors or advisers only.
Schroders Adviser Investment Forum
October 2019
Jonathan Golan, Portfolio Manager
Schroder Sterling Corporate Bond
Alpha not BetaStrong performance inbull and bear markets
Exploiting short-term volatility to create long-term value
Investment grade credit – the Schroders way
1
Source: Schroders.
Bottom upIdentifying opportunities through
in-depth fundamental credit research
Differentiated approach fromtop-down driven peers
Small is beautifulAccess to smaller issuers
No overlays, no hidden risks
Industry leading performance
2
Share class performance vs. peer group
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Morningstar/Schroders as at 30 August 2019. Performance is shown net of fees for Z Acc share class.
10.9%
5.8%
4.7%
8.7%
3.9%3.2%
9.8%
4.4%3.6%
0%
2%
4%
6%
8%
10%
12%
1 Year 2 Years (p.a.) 3 Years (p.a.)Schroder Sterling Corporate Bond Z Acc Median Manager 25th Percentile
1st quartile(11/91)
1st quartile(11/89)
1st decile(5/78)
Schroder Sterling Corporate Bond
3
What are the risks?
Discrete 5-year performance
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Source: Schroders, as at dates specified, based on share class performance, net of fees in GBP.
– The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses– High yield bonds (normally lower rated or unrated) generally carry greater market, credit and liquidity risk– A rise in interest rates generally causes bond prices to fall– A decline in the financial health of an issuer could cause the value of its bonds to fall or become worthless– A failure of a deposit institution or an issuer of a money market instrument could create losses– In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend
redemptions of its shares– Failures at service providers could lead to disruptions of fund operations or losses– The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the fund, potentially creating
a partial or total loss for the fund– A derivative may not perform as expected, and may create losses greater than the cost of the derivative– When interest rates are very low or negative, the fund's yield may be zero or negative, and you may not get back all of your investment– The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss
2018 2017 2016 2015 2014
Schroder Sterling Corporate Bond Z Acc -1.65 8.43 10.86 -1.02 10.03
Schroder Sterling Corporate Bond Z Inc -1.70 8.44 10.89 -1.08 10.07
ICE BofAML Sterling Corporate & Collateralised -1.99 4.91 11.69 0.62 12.34
A tale of three asset classes
2
Cross-asset cumulative total returns%
Source: Bloomberg, ICE BofAML, FTSE and Barclays as of 30 August 2019.
-100
-50
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
FTSE 100 Index GBP and EUR High Yield Corporate Index Sterling Investment Grade Corporate Index
Jun 2007 – Mar 2009– UK Corp: -12.7%– Euro HY: -34.4%– FTSE 100: -36.2%
2011– UK Corp: +7.0%– Euro HY: -5.4%– FTSE 100: -2.1%
H1 2016– UK Corp: +7.5%– Euro HY: +3.6%– FTSE 100: +6.7%
Q4 2018– UK Corp: -0.2%– Euro HY: -3.6%– FTSE 100: -10.4%
Jan 2000 – Jan 2002– UK Corp: +17.5%– Euro HY: -7.0%– FTSE 100: -33.1%
Keep calm and carry on
5
Schroder Sterling Corporate Bond cumulative total return and income %
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders, Bloomberg as of 28 June 2019. Data is based on CAZUCXI the Z Income share class, net of fees. Note: Cumulative total return includes re-investment of income.
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jun
2013
Sep
2013
Dec
201
3
Mar
201
4
Jun
2014
Sep
2014
Dec
201
4
Mar
201
5
Jun
2015
Sep
2015
Dec
201
5
Mar
201
6
Jun
2016
Sep
2016
Dec
201
6
Mar
201
7
Jun
2017
Sep
2017
Dec
201
7
Mar
201
8
Jun
2018
Cumulative quarterly income (%) Cumulative total return (%)
Schroder Sterling Corporate Bond
6
Fund profile
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders. Performance as at 30 August 2019. Source for rating: FE Trustnet and Morningstar as at August 2019. ¹Average portfolio credit rating is BBB+ as at 30 August 2019. ²Source: Bloomberg as of 28 June 2019. Income is not guaranteed. 3.9% is based on the past 12 month payments.
Jonathan GolanPortfolio Manager
External ratings1 year peer group rank 2 year peer group rank 3 year peer group rank
Top quartile (11/91) Top quartile (11/89) Top decile (5/78)
Industry leading performance
High grade credit portfolio1
Attractive and sustainable income of 3.9% paid out over the prior 12 months2
Bottom up investment style: Emphasis on disciplined and rigorous credit research
Quarterly Fund Update
Rigorous financial analysis
Models built in-house
Maximise cash flow transparency
Investment process
Source: Schroders. For illustrative purposes only and should not be considered a recommendation to buy or sell.
7
Business appraisal
Weekly meeting to capture secular themes
Top-line and margin sustainability
ESG Investment decision
Focus on the margin of safety
Invest with conviction
Actively harvest
Does your fund manager own GE debt? Why?
8
Outstanding corporate debt by issuer tickerOutstanding debt £m
Focus on fundamentals, express conviction and manage capacity
Source: Schroders. Mention of specific stocks here and throughout this document should not be construed as advice and are not recommendations to buy or sell shares.
Biggest issuers
Smallest issuers
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
46 issuers account for 50% of the indexWe own only 14 of those large cap issuers
Small is beautiful – Perrigo
9
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.
PerrigoCompany description
Catalyst for underperformance
Why buy?
Global pharmaceutical and consumer healthcare manufacturer and distributer. Market leader in over the counter (OTC) drugs with a focus on white label products (e.g. Boots' private label)
Ireland demanded $1.9 billion in back taxes relating to a divesture Perrigo completed several years ago
– The big picture: the company operates in a healthy non-cyclical market. White labelled OTC drugs are a win-win for Perrigo, retailers and consumers (cheaper yet more profitable than branded drugs)
– The financials stack up: Ireland has a history of settling tax disputes at lower sums than initially demanded. Exceptional earnings to cash conversion (c. 1bn EBITDA converts to 0.5bn EFCF) will allow the company to withstand a negative tax outcome.
88
90
92
94
96
98
100
102
104
106
Mar
201
7
May
201
7
Jul 2
017
Sep
2017
Nov
201
7
Jan
2018
Mar
201
8
May
201
8
Jul 2
018
Sep
2018
Nov
201
8
Jan
2019
Mar
201
9
May
201
9
Jul 2
019
Bought
Company description
Catalyst for underperformance
Why buy?
Second largest broadband provider in the UK. Number 1 market share in Fibre to the home
UK recession/Brexit fears and general market weakness
– The big picture: Virgin Media is a recession proof business, which is well positioned in ultra-fast broadband. Proprietary big data analysis indicated a subdued competitive environment
– Margin of safety 1: the senior secured bonds benefit from a first lien on the best fibre network in the county
– Margin of safety 2: Virgin’s corporate parent (Liberty Global) is awash with cash following the divesture of Unity Media
Sometimes big is beautiful too – Virgin Media
10
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.
Virgin Media
Bought
92
94
96
98
100
102
104
106
Jul 2
017
Sep
2017
Nov
201
7
Jan
2018
Mar
201
8
May
201
8
Jul 2
018
Sep
2018
Nov
201
8
Jan
2019
Mar
201
9
May
201
9
Jul 2
019
Mr. Market presents interesting opportunities
11
Naturally diversified portfolio due to bottom-up driven investment process
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Bloomberg and Schroders as of August 2019. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.
Leeds Building Society
98
99
100
101
102
103
104
Mar
201
8
Apr 2
018
May
201
8
Jun
2018
Jul 2
018
Aug
2018
Sep
2018
Oct
201
8
Nov
201
8D
ec 2
018
Jan
2019
Feb
2019
Casino
85
90
95
100
105
110
115
120
Dec
201
7
Feb
2018
Apr 2
018
Jun
2018
Aug
2018
Oct
201
8
Dec
201
8
Feb
2019
Apr 2
019
Jun
2019
Atlantia
90
92
94
96
98
100
102
104
106
108
Dec
201
7
Feb
2018
Apr 2
018
Jun
2018
Aug
2018
Oct
201
8
Dec
201
8
Feb
2019
BoughtBought Bought
Consistent outperformance driven by credit selection
12
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders as at 28 June 2019. Attribution is based on gross returns.
Date Fund return Index return Alpha (bps)
FX, Rates and Sovereign (bps)
Credit(bps)
Residual (bps)
March 17 0.6% 0.3% 30 1 29 -1
Q2 17 1.7% 0.6% 106 0 108 -3
Q3 17 1.4% 0.2% 121 -2 110 13
Q4 17 2.8% 2.0% 79 1 90 -12
Q1 18 -0.7% -1.4% 64 5 59 0
Q2 18 -0.1% -0.2% 9 -11 21 -2
Q3 18 0.6% -0.3% 91 6 69 16
Q4 18 -0.6% -0.1% -45 -5 -53 13
Q1 19 5.8% 4.7% 111 -11 136 -14
Q2 19 2.8% 2.3% 54 11 52 -9
Total 15.0% 8.2% 679 -4 680 3
What is your view on credit markets?
13
Significant rally in risk assets YTD means the easy gains are gone
Source: Schroders as of August 2019.
£ 5–10yr BBB Spread to gilts
– Valuations inside the 20-year median in a fragile macro environment leave us more cautious than earlier in the year
– We still find ample idiosyncratic opportunities
Market backdrop
0
100
200
300
400
500
600
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
£ 5-10yr BBB Corp Median Q1 Q3
G+OAS (bp)
What is your view on credit markets?
14
Source: Schroders as of August 2019. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.
– Significant rally in risk assets YTD means the easy gains are gone
– Valuations around 20-year median appear fair in a supportive yet fragile macro environment
– Sterling Investment Grade is attractive on a relative basis
– Improving yet unloved credit stories
– UK risk where Brexit premium is excessive – alternative financials, senior bonds in smaller banks
– Defensive cash flow generative sectors (housing associations)
Picks
– Industrial cyclicals (autos, capital goods)
– Long-dated corporate bonds
– Cautious on high beta sectors (subordinated financials)
Pans
Schroder Sterling Corporate Bond
15
Sector allocation% market value
Positioning as at 30 August 2019
Portfolio refers to Schroder Sterling Corporate Bond; Benchmark is BAML Sterling Corporate & Collateralised Index UC00. Source: Schroders Fixed Income Analytics. Based on un-audited data as at 30 August 2019.Note: The chart may not sum to 100 as unclassified securities, futures, IRS, forwards, cash synthetic and CDS float (non-active leg of CDS) are excluded.1Number of issuers is based on cash bond and CDS holdings only.
48
20
8 8 7 63
38
17 16
10
1
13
04
0
10
20
30
40
50
60
Indu
stria
ls
Snr.
Fin
anci
als
Util
ity
Sub.
Fin
anci
als
Sov/
Qua
si S
ov
Secu
ritiz
ed
Cash
/M.M
kts
Cove
red
Portfolio Benchmark
Statistics Portfolio Benchmark
AUM £388m £509bn
Average effective yield, % 3.49 2.06
Average effective duration, years 7.63 8.53
OAS, basis points 297 150
Number of issuers1 108 454
Average credit rating BBB+ A-
High yield, % MV 8.69 –
Currency denomination, % market value
GBP 75.57
EUR 15.10
USD 9.17
Schroder Sterling Corporate Bond
16
A low risk oasis in the global yield desert
Source: Schroders, BofAML, Barclays, as of 29 August 2019. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
Alpha not Beta
What we aim for
17
Source: Schroders.
Bottom up Small is beautiful
Supporting slides
Global forecast
19
Contributions to World GDP growth (y/y), %
World economy to cool
A future of continued slow growth and low inflation
Source: Thomson Datastream, Schroders Economics Group. 28 May 2019.
5.0
2.83.2
4.0
5.0 4.85.3 5.3
2.5
-0.6
4.9
3.7
2.8 3.0 3.2 3.22.7
3.3 3.32.8 2.6
-3
-2
-1
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
US Europe Japan Rest of advanced BRICS Rest of emerging World
Forecast
Small is beautiful
20
7 out 8 managers with AUM >2 billion are in the 3rd
and 4th quartile over the past 5 years
Larger asset size precludes delivering returns from security selection
Source: Morningstar based on £ Corporate Bond sector.
Yet exposures are skewed to large managers
13%
63%
25%
0%
10%
20%
30%
40%
50%
60%
70%
% in 1st quartile % in 2nd quartile % in 3rd quartile % in 4th quartile
54%
20%
11%
11%4%
>2bn 1–2bn 500m–1bn 250–500m <250m
Distribution of sector AUM by manager size (%)
Choosing the right fund
21
Schroder Sterling Corporate Bond vs. UC00
Fund selection is at least as important as market timing
Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. Source: Schroders, as at 31 July 2019. Performance shown gross of fees since Jonathan began working on the fund. UC00 is the Merrill Lynch Sterling Corporate and Collateralised Index.
-2%0%2%4%6%8%
10%12%14%16%18%20%
Mar
201
7
Apr 2
017
May
201
7
Jun
2017
Jul 2
017
Aug
2017
Sep
2017
Oct
201
7
Nov
201
7
Dec
201
7
Jan
2018
Feb
2018
Mar
201
8
Apr 2
018
May
201
8
Jun
2018
Jul 2
018
Aug
2018
Sep
2018
Oct
201
8
Nov
201
8
Dec
201
8
Jan
2019
Feb
2019
Mar
201
9
Apr 2
019
May
201
9
Jun
2019
Jul 2
019
Market Duration Returns Market Credit Returns Schroders Alpha
Schroder Sterling Corporate Bond
22
Credit risk as measured by spread duration Years
Reducing market risk into strength and concentrating on our best ideas
Source: Schroders Fixed Income Analytics. Based on un-audited data as at 31 July 2019. Portfolio is Schroder Sterling Corporate Bond; Benchmark is BAML Sterling Corporate & Collateralised Index UC00.
6.5
7.0
7.5
8.0
8.5
9.0
9.5
Mar
201
7
Jun
2017
Sep
2017
Dec
201
7
Mar
201
8
Jun
2018
Sep
2018
Dec
201
8
Mar
201
9
Jun
2019
Portfolio Benchmark
Schroder Sterling Corporate Bond
23
Sector allocation within financials% market value
Positioning as at 30 August 2019
Portfolio refers to Schroder Sterling Corporate Bond; Benchmark is BAML Sterling Corporate & Collateralised Index UC00.Source: Schroders Fixed Income Analytics. Based on un-audited data as at 30 August 2019. Breakdown of Industrials and financials is based on Bank of America Merrill Lynch classification level 3.
13
-1
1 0 1 1
6
14
2 1
13
40 1 1 0 0
41 2
0 0
-5
0
5
10
15
BankingSNR
Banking LT2
BankingT1
InsuranceSENR
InsuranceSECR
InsuranceLT2
InsuranceUT2
InsuranceSUB
InsuranceJSUB
FinancialServices
SENR
FinancialServices
SECR
FinancialServices
SUBPortfolio Benchmark
Sector allocation within industrials % market value
18
5 5 5 5 4 41 1 1 1
-2
95 4 2 2 2
63 1 1 2 0 1
-5
0
5
10
15
20
Real Estate Services Cons. Non-Cyclical
Energy Healthcare Cons. Cyclical Telecoms Automotive Tech &Electronics
Media Capital Goods Industrials -CONV
Basic Industry
Portfolio Benchmark
Schroder Sterling Corporate Bond
24
Rating % market value
Portfolio characteristics as at 30 August 2019
Portfolio refers to Schroder Sterling Corporate Bond; Benchmark is BAML Sterling Corporate & Collateralised Index UC00. Source: Schroders Fixed Income Analytics. Based on un-audited data as at 30 August 2019. Rating: chart will not add up to 100 as it does not include futures, IRS, forwards, cash synthetic or the CDS float(non-active leg of the CDS). Country of risk: exposures <1% have been excluded.
0
715
59
4 4 56 10
3648
0
-100
10203040506070
AAA AA A BBB BB B NR
Portfolio Benchmark
Asset swap spread% market value
Country of risk % market value
Duration % market value
66
8 5 3 3 3 2 2 2 1 1 1 1
57
15 8 6 2 1 1 1 1 10
10203040506070
UK
USA
Fran
ce
Ger
man
y
Net
herla
nds
Ital
y
Mex
ico
Switz
erla
nd
Isra
el
Icel
and
Swed
en
Spai
n
Luxe
mbo
urg
Portfolio Benchmark
-2
20
35
15 127
13
34
48
124 1 0
-100
102030405060
<0 0–99 100–199 200–299 300–399 400–500 >500
Portfolio Benchmark
1
0
19 1923
14
911
5
-1
1
1613
18 1821
9
2 1 0
-5
0
5
10
15
20
25
<0y 0–1y 1–3y 3–5y 5–7y 7–10y 10–15y 15–20y 20–25y 25–30y 30+y
Portfolio Benchmark
Schroder Sterling Corporate Bond
25
Top 10 long positions (MV%)
Source: Schroders FIA at 31 July 2019, Based on un-audited data. Long positions by market value (%) (including single name CDS but excluding gilts and CDS indices). Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.
Ticker Name (%)
LONQUA London & Quadrant 2.92
HTHROW Heathrow Airport 2.63
NGGLN NGG Finance Plc 2.34
PRUFIN Prudential 2.32
VIRGMN Virgin Money 2.26
BATSLN British American Tobacco 2.18
YBS Yorkshire Building Society 2.10
TEVA Teva Pharmaceuticals 1.95
GRILN Grainger Plc 1.95
PEMEX Petroleos Mexicanos 1.91
Important information
For professional investors or advisers only. This material is not suitable for retail clients.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Schroders has expressed its own views and opinions in this document and these may change.
This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Information herein is believed to be reliable but we do not warrant its completeness or accuracy.
Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data.
The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion.
The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
Any references to securities, sectors, regions and/or countries are for illustrative purposes only.
Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage.
FTSE Third Party Data Disclaimer: FTSE International Limited (‘FTSE’) © FTSE. ‘FTSE®’ is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.
Sustainability AccreditationOur Schroders Sustainability Accreditation helps investors distinguish how ESG factors are considered across our products. The fund has been awarded an Integrated accreditation. ESG factors are embedded into the investment process and can be clearly evidenced. There is a strong commitment to stewardship and company engagement. For further information about our Schroders Sustainability Accreditation please visit www.schroders.lu/sustainabilityaccreditation
26
Important information
Risk factors:As a result of fees being charged to capital, the distributable income of the fund may be higher but there is the potential that performance or capital value may be eroded.
The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses.
High yield bonds (normally lower rated or unrated) generally carry greater market, credit and liquidity risk.A rise in interest rates generally causes bond prices to fall.
A decline in the financial health of an issuer could cause the value of its bonds to fall or become worthless.
A failure of a deposit institution or an issuer of a money market instrument could create losses.In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares.
Failures at service providers could lead to disruptions of fund operations or losses.
The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund. A derivative may not perform as expected, and may create losses greater than the cost of the derivative.
When interest rates are very low or negative, the fund's yield may be zero or negative, and you may not get back all of your investment.
The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss.
For your security, communications may be taped or monitored.
Issued in October 2019 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, who is authorised and regulated by the Financial Conduct Authority.
27
ContactSchroder Investment Management Limited,
1 London Wall Place, London EC2Y 5AU.
schroders.com