Global Convertible Bonds Investment Rationale

Transcription

1 Marketing material for professional investors or advisers only Global Convertible Bonds Investment Rationale

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3 Strategy overview 10 year Schroders has been offering convertible bond strategies now for ten years and are proud to look back at an exceptional track record. The strategic set-up of an unconstrained, balanced strategy has remained in place over the full ten years. Schroders can also look back at a very stable investment team, with Peter Reinmuth at the helm of its convertible bond funds since aims to provide a return of capital growth primarily through investment in convertible bonds across the globe, from the US and Europe to Asia. This balanced strategy invests in high quality convertible bonds without any regional restrictions. We focus our strategy on balanced convertible bonds in order to exploit equity market upside with efficient downside protection. In the long run, our investors can benefit from near equity-like performance with a more attractive risk/return profile than traditional equity investments. The long running conversion right makes convertible bonds a fascinating package deal combining the defensive qualities of fixed income with the growth potential of equities. Historically the asset class has demonstrated a more attractive risk/return profile than both equities and fixed income. It is impossible to replicate this profile even by combining the three separate income components. With their equitylike returns and lower volatility, convertible bonds provide participation in the upside potential of equities whilst offering an element of downside protection. Strategy performance The Schroders team has been managing active convertible bond strategies for 10 years now. Our opportunistic, balanced convertible approach shows a solid and sustainable outperformance against the Thomson Reuters Global Focus convertible bond index. 170% 150% 130% 110% 90% 70% Schroder Convertible Bonds Global Opportunistic USD (GIPS) Thomson Reuters Global Focus % +1.31% +1.68% -1.51% +0.86% +4.65% +0.89% +0.90% +1.83% +3.06% Source: Schroders, Bloomberg, 28 February 2017, data for Schroder GIPS composite gross in USD. Past performance is not a guide to future performance and may not be repeated. 3

4 Risk considerations 10 year 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 other debt instruments including related derivatives is subject to interest rate risk. The value of the fund may go down if interest rate rise and vice versa. It may be difficult to sell quickly positions of one or more companies to meet redemption requests upon demand in extreme market conditions. Strategy objectives The equity part is responsible for most of the performance. The fixed income element brings stability and protection to the asset allocation. When defining the strategy in 2008, we set clear-cut long-term objectives. As an opportunistic convertible strategy we aim to benefit significantly from positive equity participation. Looking at rolling investment periods, the strategy participated roughly 75% to 80% from the equity upside. The protective element also worked well, protecting more than half of the equity downside in falling markets over short investment horizons o 12 months, and adding absolute positive returns against falling equities over 2 years to 4 years. Equity investors needed to wait for 5 and 6 years to be back in positive territory. Downside Equity Markets Upside Equity Markets 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% 1Y 2Y 3Y 4Y 5Y 6Y 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1Y 2Y 3Y 4Y 5Y 6Y Schroder Convertible Bonds Global Opportunistic Equity (MSCI World AC) Schroders, Bloomberg, 28 February 2018, data for Schroder GIPS composite gross in USD. Past performance is not a guide to future performance and may not be repeated. 4

5 Buy Strategic opportunity 10 year When we launched the in March 2008, the idea was to harness the unique qualities of convertible bonds. At a time when most competitors were running rather inflexible fixed delta-range strategies, it was Schroders to design an opportunistic approach with a clear focus on balanced convertible bonds yet with a slight tilt to outperform in positive equity markets. What makes the strategy unique is the combination of a traditional value approach we model and price all convertible bonds and search for bargains with an equity momentum approach. The result shows few years with losses against a sea of green absolute return figures. More importantly, the underwater periods time frames in which investors had to endure losses are relatively small. After an investment horizon of three years, the absolute performance figures have indeed always been positive. What we do not lose when equity markets fall, we do not have to regain in a market recovery. The below chart shows all possible buy and sell date combinations of our 10 year strategy. 9.1% % 12.8% % 4.1% 5.7% % 5.2% 4.6% 5.7% % 11.5% 9.2% 7.7% 8.0% % 14.9% 11.7% 9.9% 8.6% 8.7% % 2.6% 7.4% 7.0% 6.5% 6.0% 6.4% % 2.1% 5.4% 8.3% 7.8% 7.3% 6.7% 7.0% % 17.9% 9.3% 10.0% 11.5% 10.5% 9.7% 8.9% 8.9% 2008* Sell Source: Schroders, January 2018, data for Schroder Convertible Bonds Global Opportunistic GIPS composite gross in USD; please note that performance in 2008 does not include the full annual year. Past performance is not a guide to future performance and may not be repeated. 5

6 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Tactical opportunity 10 year The recent equity market set-back once again proved the resilience and in-built protection of convertible bonds. We had positioned the strategy in a conservative yet constructive setting and could avoid a significant part of the equity market downside. At the same time, the higher volatility levels in the market did affect the valuation of convertible bonds. At Schroders, we model each and every convertible bond in our investable universe. Hence, we are able to set a fair value and compare this to the current market price. The result shows that in general convertibles are slightly rich, but Asian as well as Japanese convertibles offer attractive valuations. Moreover, valuations of convertible bonds had already cheapened in Q % 4% 2% 0% -2% -4% -6% Total Americas Asia Europe Japan Source: Schroders as at 14 based on constituents of the TR Global Focus convertible bond index. The Japanese and Asian regional markets continue to offer relative opportunity compared to other regions. We now see several index constituents of the Thomson Reuters Global Focus index as slightly undervalued. This is even more true for off benchmark positions and convertible bonds just outside of the traditional convexity range. We believe that we are able to find some bargains for the strategy. Lately, we have moved the overall risk allocation in the fund to a conservative, yet constructive level. Opportunistic does not necessarily mean aggressive for us rather that we are prepared to seize chances wherever and whenever they occur. With the equity market bull run coming to a very late stage, we have been successful in lowering our risk and delivering performance by positive stock selection. 6

7 Team 10 year Zurich is the global centre of competence for convertibles at Schroders. The team around Peter Reinmuth who has been managing the funds for nine years is responsible for an asset base of over USD 2bn in convertible bond strategies. Four fund managers and two dedicated convertible traders take care of the daily investment decisions. The product manager takes responsibility for the strategy definition and set-up, and has helped to create and implement all Schroders convertible strategies for the last decade. Source: Schroders, as at. 7

8 10 year 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. The offering of shares in certain jurisdictions may be restricted and accordingly persons are required, by the Company, to inform themselves of and observe any such restrictions. Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semiannual report, if published). The prospectus and the key investor information document(s) for Switzerland, the articles of association, the annual and semi-annual reports can be obtained, free of charge, at the offices of the Swiss representative, Schroder Investment Management (Switzerland) AG, Central 2, P.O. Box, CH-8021 Zurich (authorised and regulated by FINMA) and the Swiss paying agent, Schroder & Co. Bank AG, Central 2, P.O. Box, CH-8021 Zurich. An investment in the Company entails risks, which are fully described in the prospectus. The Company has its registered office in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Past performance is no indication of future fund performance. This depends on the trends in markets, investment returns and exchange rates (if relevant), and how successful the asset manager is in implementing the investment policy. The performance shown does not take account of any commissions and costs charged when subscribing and redeeming units. Prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. This document is issued by Schroder Investment Management (Switzerland) AG, Central 2, 8001 Zurich. For your security, communications may be taped or monitored. 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 in connection with the third party data. The Prospectus and/or contains additional disclaimers which apply to the third party data. 8

9 10 year Composite Performance Results Composite Schroder Convertible Bonds Global Opportunistic USD Hedged Primary Benchmark Thomson Reuters Global Focus USD Hedged Convertible Bond Index (UCBIFX02) Secondary Benchmark n/a Currency: USD Gross Returns as of: 31 Dec 2016 Firm: SIMSAG Year Gross Composite Return Net Composi te Return Primary Benchm ark Return 3 Year Composi te Risk 1 3 Year Primary Benchmark Risk 1 Number of Portfolios (throughout period) Account Dispersion 2 Market Value at end of Period % 2.15% 1.59% 6.38% 3.38% < 5 n/a % 3.43% 3.83% 6.27% 5.52% < 5 n/a 1'853'971' % 4.32% 4.73% 6.01% 5.19% < 5 n/a 1'771'404' % 16.23% 13.03% 8.11% 6.81% < 5 n/a 2'060'067' % 10.73% 11.26% 10.08% 7.72% < 5 n/a 847'059' % -7.25% -4.58% 10.59% 8.36% < 5 n/a 477'463' % 9.69% 9.38% n/a n/a < 5 n/a 364'723' % 23.68% 23.91% n/a n/a < 5 n/a 191'506' % % % n/a n/a < 5 n/a 34'771'895 As at Dec 2016 Annualised 3 Year Annualised 5 Year Annualised 7 Year Annualised 10 Year Gross Composite Return Net Composi te Return Primary Benchm ark Return Composi te Risk 1 Primary Benchmark Risk % 3.30% 3.38% 6.38% 5.95% 8.58% 7.24% 6.80% 6.48% 5.81% 6.70% 5.38% 5.45% 8.07% 6.60% n/a n/a n/a n/a n/a Annualised S.I % 4.18% 3.83% 10.10% 9.46% 1 Annualised standard deviation of gross monthly returns for the composite and monthly returns for the benchmark. 2 Asset weighted standard deviation of annual gross returns of accounts that have been in the composite for the entire year. 3 Since Inception. 4 Since 31 December 2003 Total Firm Assets include non-fee paying accounts Total Firm Assets value has been restated due to the inclusion of those non-fee paying accounts. Total Firm Assets from 2007 incorporate the UK and US firm merger as detailed in the Definition of the Firm, from the start of 2011 Schroder Property Investment Management Multi Manager accounts are included in the Total Firm Assets. Composite Disclosures Composite - Schroder Convertible Bonds Global Opportunistic USD Hedged Disclosures as of: 31 Dec 2016 INT-C Definition of the Firm The Firm is defined as all institutional accounts managed by Schroder Investment Management (Switzerland) AG (SIMSAG) in Switzerland. Assets managed against a liability driven mandate or invested in direct property are excluded from the GIPS Firm. A complete list and description of the Firm's composites and performance results is available upon request. Composite Definition The Schroder Convertible Bonds Global Opportunistic USD Hedged Composite (the Composite) is comprised of all fully discretionary accounts that meet the firm definition which seek to achieve returns above the Thomson Reuters Global Focus USD Hedged Convertible Bond Index (UCBIFX02) through investment primarily in convertible securities and other similar convertible securities. Accounts in the composite will be managed in an unconstrained style and on average will have a bias towards investing into convex or balanced convertible bonds. Accounts will be hedged back to USD. Derivatives may be used to achieve the investment objective and to reduce risk or manage the fund more efficiently. Composite Construction New accounts are included from the beginning of the first full month of management on a discretionary basis. Terminated accounts are excluded from the end of the last full month of discretionary management. This Composite has no minimum asset level for inclusion. The composite currency is US Dollar. Composite Inception Date: 31 Mar 2008 Composite Creation Date: 2 Dec

10 10 year Calculation Methodology The portfolio returns are time-weighted rates of return that are adjusted for cash flows. Portfolio returns are combined using beginning of period asset weights to produce the composite return. Periodic returns are geometrically linked to produce annual returns. Dividends on equities are recognised net of irrecoverable withholding tax. Since January 1999 dividends have been recognised as of the ex-dividend date having previously been recognised on a cash basis. Performance results are presented before the deduction of management fees and custodian fees but after trading expenses. Dispersion The dispersion of annual returns is measured by the asset weighted standard deviation of portfolio returns represented within the composite for the full year provided a minimum of 5 portfolios are available. Additional information The exchange rates used are provided by WM. Each currency is valued at 4 pm on the last business day of the month. Additional information regarding policies for valuing portfolios, calculating and reporting returns and a description of all composites are available on request. GIPS Compliance and Verification SIMSAG claims compliance with the Global Investment Performance Standards GIPS and has prepared and presented this report in compliance with the GIPS standards. SIMSAG has been independently verified for the periods 31 December 2009 to 31 December Verification assesses whether (1) the Firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firms policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Fee Schedule The fee scale applied to the composite is 1.25% p.a. 10