Schroder ISF Global Convertible Bond. Monthly Fund Update. 10 year anniversary. Market Overview. Historical Performance USD. Covering March 2018

Transcription

1 Marketing material for professional investors or advisers only Schroder ISF* Global Convertible Bond Monthly Fund Update 10 year anniversary Market Overview Performance % USD EUR CHF Feb year 3 years (p.a.) 5 years (p.a.) I class -0.76% 5.95% 4.22% 6.65% A class -0.89% 4.34% 2.61% 4.98% BM -0.84% 3.41% 2.38% 5.08% I class -1.01% 3.90% 2.95% 5.81% A class -1.14% 2.32% 1.34% 4.15% BM -1.02% 1.59% 1.29% 4.37% I class -1.02% 3.34% 2.41% 5.38% A class -1.14% 1.77% 0.82% 3.73% BM -1.05% 1.21% 0.80% 3.98% Source: Schroders as at 31 March All performance data shown bid to bid, net of fees Historical Performance USD Fund (A Acc) Fund (I Acc) BM % 9.0% 6.0% % 3.2% 1.6% % 4.8% 3.8% % 5.7% 4.7% % 17.7% 13.0% Benchmark: Thomson Reuters Global Focus Convertible Bond Index (hedged for USD/EUR/CHF). All performance data shown bid to bid, net of fees. Source: Bloomberg/Schroders as at 31 December 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. Global stock markets trended downwards in March. Volatility remained with market indices turning and twisting on a daily basis. After the long period of calm, a volatility level of around 20% as measured by the Chicago Vix feels elevated, but only translates into daily up and down swings in the single digit percentage range. Market discussions were dominated by the tariffs implemented by the US government. First planned as a 25% tariff for all steel and 10% for aluminium imports, the US then implemented exceptions for Europe. China as the world s largest steel produces was hit hardest even though it only makes up for 2% of the US steel imports. China retaliated by moving up the tariff on US agricultural goods. Turning to monetary policy, where the new Federal Reserve (Fed) chairman Jerome Powell continued the course set previously by Janet Yellen. Interest rates in the US remain on a slow and gentle upward trend. The March raise of 0.25% represents the sixth raise since the rate cycle turned in December The Federal Funds rate now stands at %. Powell gave a balanced message of rising rates without appearing too hawkish. Still, the longer end of the US yield curve came down. Usually, a flattening of the curve with rising rates on the short and falling rates on the long end represents a negative sign for the economy. Combined with widening credit spreads and investors pulling assets out of high yield exchange-traded funds (ETFs), risk assets clearly were not in favour. In the US, the Dow Jones, S&P and Nasdaq all finished the month in negative territory for a second month in a row with -3.6%, -2.5% and -2.8% respectively. In Europe, the Eurostoxx was down by -2.2% driven by the quite negative results of the market heavyweights: Germany s Dax and France s CAC 40 (both at -2.7%). Bourses in Italy and Spain were down by -0.9% and -2.4% respectively. The UK FTSE 100 finished the month with a loss of -2%. Over to Asia, where Hang Seng and China s CSI both finished the month with losses of -2.3% and -3.2%. Japan s Nikkei went down -2.1%. Taiwan was the odd one out with a slight increase of 0.3% over the month of March. *Schroder International Selection Fund is referred to as Schroder ISF throughout this document 1

2 The overall MSCI World equity index was down by -2.1%. Convertible bonds as measured by the Thomson Reuters Global Focus Convertible Index returned -0.9% in USD terms. Our fund protected assets slightly better in falling markets. Portfolio Overview Overall the fund remained conservatively positioned. The equity exposure of the fund remained under the 40% mark and hence below benchmark level. Combined with a consistent conservative credit exposure and a low effective duration of just above two years the portfolio is still positioned to provide a high amount of protection. However, we have actively exploited some weaker days in the market and used additional liquidity from inflows into our fund to add positions in Japan and to lesser extent the US. Similar to the last months, we remain careful in regard to US convertibles and have kept equity exposures well below the benchmark. This view is very much based on the structure and valuations of US convertibles which we see as both, rich and risky. Our approach has a clear focus on balanced structures with attractive downside protection. Hence, our regional positioning clearly favours Japanese convertible bonds. At a sector level, we remain positive on materials and health care. Consistent with the last few months, we continue to be underweight in IT companies, financials and consumer names. The primary market for convertible bonds was very active again in March with a volume of $7.5bn of new convertible bonds. This brings the overall issuance in the first quarter of 2018 to $26.8bn. The market is clearly growing in size. Amongst others we participated in two IT names from the US, Guidewire and Zendesk, as well as Swiss-based materials company Glencore. The fund s running yield continues at around 0.6%. The portfolio s bond floor stands at a level of 83% while the overall credit rating of the fund stayed on a BBB average. Outlook and Strategy We had already stated that the February set-back had not sufficiently cleared the air and hence are not surprised to see further headwinds from equity markets in March. We have not changed our mid-term opinion and remain with last month s statement: The market shake up has not been sufficient to quell optimism and market sentiment is still far from depressed. Over the last year we have applied a remarkably low level of equity and credit risk in comparison to the fund s history. We will continue to move the risk allocation of the fund by buying into the dips but overall remain with our conservative yet constructive approach. Our long-term objective remains to capture a large part of the equity upside and this is the overall theme which we have applied over the years. However, that does not mean simply having more risk exposure compared to the index or a simple overweight of equity exposure. Macroeconomic fundamentals very much supported the strong rally over the last 18 months: throughout the world economic growth is solid and has surprised most economists on the upside. The US has just published strong macro data for the last quarter of 2017 reporting robust growth of 2.5%. Europe is growing with similar speed, with peripheral countries contributing, while Asia remains the growth region of the world. This positive global growth outlook continues to look set fair. On the other hand, we believe that good news remains encompassed in markets whereas surprises could lurk on the negative side. On balance we still see the risk of a more meaningful repricing of risk assets and hence it seems reasonable to once more emphasise the protective qualities of convertible bonds. These include: Protection against equity set-backs due to the conversion right s optionality and the bond floor of the fixed income element. Protection against rising interest rates with a short to medium effective duration And, at least with the more defensive convertibles, good downside protection against suddenly widening credit spreads. We would not be surprised to see these demonstrated over the next months. In case it turns out that we are too negative, we still have a decent 37% equity exposure in the fund to give us sufficient lift from the markets. One of the smartest parts in any investor s asset allocation is convexity. Gaining more on the upside than losing on the downside may sound trivial, but it is a firm foundation for long term success. With a well-run convertible bond strategy you can give up some upside for significantly more downside protection. 2

3 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 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. 3

4 Fund Data as at 31 March*** Team Portfolio managers Size & Holdings Fund size in base currency (USD) Dr. Peter Reinmuth Chris Richards, CFA bn Region Allocation Portfolio Index America 24.08% 28.88% Asia ex Japan 16.75% 18.24% Europe 30.26% 33.73% Japan 26.19% 16.84% Others 1.93% 2.07% Number of issues 193 Cash 0.79% 0.00% Portfolio Statistics**** Equity Sensitivity 41.39% Delta 0.45 Bond Floor 85.99% Sector Allocation Portfolio Index Consumer Discretionary 15.66% 16.78% Consumer Staples 2.55% 3.36% Energy 3.87% 3.21% Average Rating Credit Spread BBB 135 bps Financials 5.40% 6.05% Health Care 10.94% 9.19% Yield 0.60% Effective Duration 2.08 years ***Source: Schroders as at 31/03/2018. 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. Industrials 17.12% 13.34% Information Technology 17.55% 18.79% Materials 14.32% 8.03% Real Estate 4.16% 10.57% Telecommunication 2.92% 5.13% Utilities 4.74% 5.56% Cash 0.79% 0.00% 4

5 Credit Rating Equity Sensitivity AAA AA A 0.00% 0.30% 2.38% 1.76% 29.26% 30.42% 0-20% 20-40% 28.48% 28.02% 35.24% 30.15% BBB BB B 6.95% 13.33% 23.20% 22.86% 38.22% 31.33% 40-60% >60% 18.52% 15.42% 17.76% 26.41% Thomson Reuters Global Focus Convertible Bond Index Thomson Reuters Global Focus Convertible Bond Index Source: Schroders as at 31/03/2018. Top Ten Issues Holding Portfolio Sector 1 Siemens 1.650% 16-Aug % Industrials 2 Royal Gold 2.875% 15-Jun % Materials 3 Deutsche Post 0.050% 30-Jun % Industrials 4 Sony Corp 0.000% 30-Sep % Consumer Discretionary 5 BT Group / Orange 0.375% 27-Jun % Telecommunication Services 6 Technip 0.875% 25-Jan % Energy 7 Brenntag 1.875% 02-Dec % Industrials 8 Ilda Group 0.000% 18-Jun % Consumer Discretionary 9 Haitong International 0.000% 25-Oct % Financials 10 Western Digital 1.500% 01-Feb % Information Technology Source: Schroders as at 31/03/2018. 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. Schroders has expressed its own views and opinions in this document and these may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No England. Authorised and regulated by the Financial Conduct Authority. 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. 5