Schroders Euro Corporate Bond Product description Schroder ISF Euro Corporate Bond aims to generate significant, above-average benchmark returns. The team invests predominantly in investment grade corporate bonds, but there is also the flexibility to hold sub-investment or High Yield corporate bonds, and overseas bonds (hedged back to euro). The strategy also uses a range of derivative instruments such as Default and Interest Rate Swaps to generate additional outperformance in all market conditions. Investment objective Consistent, low volatility outperformance of the Merrill lynch Euro Corporate bond Index +0.75% (gross) over rolling 3 year periods. Key features and benefits Vast experience in fixed income investing Schroders has over 50 years of fixed income investment experience Dedicated well-resourced team Experienced and dedicated team of dedicated European & UK corporate bond fund managers Supported within a highly resourced global fixed income team with over 100 investment professionals including 25 credit analysts, 2 in-house economists and a dedicated quantitative analysis team. Key Features Maximises investment opportunities in the European corporate bond universe Flexibility to invest in overseas bonds Exploits the best investment ideas generated by Schroders global fixed income team Allocation to sub-investment grade to enhance returns Derivatives used to implement strategies as appropriate Duration and yield curve strategies integral to alpha generation Disciplined investment process Combines top down beta strategy with bottom up industry and security selection Fundamental research backed by quantitative models Invests only in securities approved by Schroders credit analysts Risk management central to the investment process.
Investment Philosophy Schroders' approach to managing corporate bonds shares our philosophy with other fixed income asset classes we adopt a methodology based upon fundamental analysis and exploiting small and frequent investment decisions across the widest possible range of uncorrelated opportunities. This broadens the investable universe and is designed to deliver an optimal combination of risk and return to our clients. We believe that corporate bond markets are generally efficient. However, inefficiencies and opportunities can be created by the following factors: market segmentation, regulation, forced buyers and sellers, short-term overreaction, and the existence of information advantage. Our active investment approach, which constructs portfolios from a number of different risk positions across market sectors, is able to profit from these short-term inefficiencies when they arise. The frequent occurrence of market inefficiencies and the ability to exploit them make our approach successful. Investment process The investment process combines both a top-down and bottom-up approach. Top-down analysis focuses on the macro-economic environment and the likely outturn of the underlying economic variables. Bottom-up analysis identifies investment opportunities at the sector and security level. The portfolio manager synthesises these specialist inputs in the portfolio construction process when considering which stocks to hold within the portfolio. Risk is carefully controlled through the diversification of investments across a wide range of strategies. The investment process can best be described as a three part process: 1.Strategy formulation 2. Portfolio construction 3. Risk management Fundamental and quantitative input market score card and recommended strategy output Size major strategies based on scorecard and risk management Choose suitable diversification of issuer -Contribution to duration - Tracking error Strategy Formulation Strong strategy formulation is dependent upon multiple inputs both on a sector basis as well as a global basis. Corporate bond portfolio managers at Schroders benefit from multiple internal sources of research combined with a significant fixed income team that consists of regional and sector specialists working together on a global platform. Asset Stock Interest Allocation Selection Rates Inputs Scorecard Analysis Government Bond Scorecard Outputs Bias Analyst Ratings Rates Bias Implementation Over/underweight credit Sector Curve Off - index (EMD, HY) Overweight/under weight specific issuers and issues 100-250 holdings 6-12 month holding period 0-5% position size Duration +/ - 23 years vs benchmark Yield curve Risk Control
European corporate bond fund managers summarize their outlook for the asset class in a Market Scorecard. This document, updated on a monthly basis, provides an overall score for European corporate bonds attractiveness at the time and provides the team with a formal tool when recommending and setting strategy. The overall credit bias strategy is then combined with specific bottom-up security selection. Research The credit analysis input is the result of research undertaken by credit analysts into the merits of individual bond issuers. The analysts follow a consistent approach in determining the credit quality of a bond issuer by examining the issuer s business and financial profile. In analysing the multitude of factors that influence credit quality, credit analysts use a wide range of information sources, both internal and external to Schroders. The global corporate bond universe consists of approximately 10 000 issues (estimated using Merrill Lynch index data), and Schroders credit analysts cover approximately 1000 issuers world wide. In order to focus our attention to the issuers that will make a difference in our clients portfolios, we filter the bond universe. The first filter used is a simple liquidity level where the sizes of the bond issue it taken into consideration. Smaller illiquid issues are not analyzed. The core selection, typically similar to a large cap market index, provides our analysts with most issuers to be covered. However, many highly rated stable corporate bond issuers are not going to provide significant opportunity for overweight /underweight strategies in portfolios. Schroders dedicated quantitative team has developed a rich/cheap screening tool, Research Alpha Tool (CRAFT), which provides a list of rich and dear corporate credit securities on a daily basis. The screening tool basis its research on a universe of 3000 issuers applying a wide set of data affecting the relative price of the security, Corporate Universe Liquidity Filters Analyst Core Selection CRAFT 3000 Issuers Directional Opinion Analysis: quality direction measures: Improving Moderately improving Stable Moderately Declining Declining Recommendation Analysis: Schroders view vs. market expectations of magnitude and direction measures: Strongest Focus List of 800-1200 issuers Weakest Analyst veto on issuers ranked D The credit analysts convey their research opinions and investment recommendations through a variety of formal and informal methods. Analysts regularly issue industry and bond issuer credit research reports. These reports and a weekly Global Strategy document provide the framework for the debate on investment decisions. The final opinion of the credit analysts, which is conveyed to the portfolio manager, has three elements. recommendation, which is a credit ranking from 1 (positive) to (strongly negative). opinion on whether the credit quality is improving, moderately improving, stable, moderately declining or declining. issuer concentration limits of A-E, with an A ranking being the most volatile. This serves as a portfolio management tool, with maximum holdings per issue relative to the benchmark allocated with respect to volatility. The Portfolio managers focus on building portfolios with securities rated one and two in industries, which are in favour.
Portfolio construction and risk management Portfolio construction and risk management are highly interlinked and a central part of our investment process. A strong focus on this part of the investment process is essential in order to create high information ratio and a stable excess return. During our portfolio construction process, we focus on diversification of risk across a variety of strategies including, sector allocation, industry and security selection, duration and yield curve. Portfolio construction follows naturally from the strategies articulated in the weekly strategy meetings, in addition, as new market information emerges, an analyst revises a credit opinion or simply there is a flow of funds into the portfolio, the team will have an ad hoc meeting to review the portfolio and how, if at all, it should be repositioned. The risk parameters define the maximum positions we can take versus the benchmark and the actual positions are determined by the level of conviction the team has in a particular strategy. We use a number of measured to ensure we have a suitable level of risk within portfolios. We monitor tracking error of the total portfolio, as well as a factor model to measure contribution to tracking error from key risk positions. These are identified separately as systematic risk (e.g. key rate duration, exposure to inflation, investment grade, high yield, Default Swap, etc.) and non-systematic risk (e.g. individual credit exposures). Concentration Limits is based on the credit analysts views of stocks in terms of volatility. All risk parameters are monitored continuously. Sector and credit positions are measured in terms of market value percentage and contribution to spread duration. Detailed analysis of all risk positions enables us to ensure that no single individual risk position will dominate portfolio returns. The main risk systems used in fixed income are shown in the graph below. Fixed Income Analytics Proprietary to Schroders Position Monitoring Allocation by : Percent Duration Rate & Spread Country Exposure Yield Curve OAS & ASW Beta Sector Rating Currency Quick Risk Proprietary to Schroders Pre Trade Risk Optimiser Tracking error of portfolio Tracking error contribution Asset Class Key Rate Duration Sector Security Charles River Execution and Compliance Online Pre trade compliance Trade execution system Ongoing portfolio compliance Derivative team sheet application Implementation Schroders has committed separate resources for implementation. The fixed income trading desk is responsible for transacting for all portfolios managed in our London office. In addition, our dedicated group of Fund Manager Assistants are responsible for making sure that strategies are applied correctly across all applicable portfolios and identify portfolio-specific restrictions that limit holdings of certain issuer names or do not permit investment in certain asset classes. This is a highly efficient process, ensuring that our portfolio managers can focus on strategy and, importantly, we have fair treatment of clients. The group uses the Charles River compliance engine to ensure that any trade proposed for a portfolio passes the investment criteria specified by that portfolio before execution.
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 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. In accordance with the current prospectus, other than for Schroder ISF Global Property Securities, Schroder ISF Asia Pacific Property Securities, Schroder ISF European Defensive and Schroder ISF Middle East, the Company will seek UK distributor status for all distribution A and C shares and I shares of Schroder ISF Taiwanese Equity. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a guide to future performance and may not be repeated. Investors may not get back the full amount invested, as prices of shares and the income from them may fall as well as rise. Third party data is owned by the applicable third party identified above 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 are set forth in the Important Information section at www.schroders.lu. Exchange rate changes may cause the value of any foreign investments to rise or fall. Schroders has expressed its own views and opinions in this document and these may change. Schroder ISF EURO Corporate Bond is within the scope of the European Union Directive 2003/8/EC (Taxation of Savings Income in the Form of Interest Payments), as implemented in Luxembourg Law. This document is issued by Schroder Investment Management (Luxembourg) S.A., R.C.S. Luxembourg: B 37.799, 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. For your security, all telephone calls are recorded.