August 2011 For professional investors and advisors only. Not suitable for retail clients. Schroders Global Equity Solutions for Defined Contribution
Global Equity Solutions Active vs passive Why active management? Passive strategies may be cheap, but markets have provided a horrible experience over the last ten years. Passively following markets up and down could well be a very poor alternative to a broadly diversified, actively managed fund. Alan Brown Chief Investment Officer, Schroders Defined by an index While defined benefit schemes continue to make full use of both active and passive management, currently as much as 75% of all defined contribution (DC) assets are being invested on a passive basis. In addition, the growth or accumulation phase for most DC default investment options is typically invested in passive global equities. Whilst investing on a passive basis has historically provided a low cost and light touch governance option, many DC investors could be missing out on the benefits of an active approach, particularly in the growth phase, when maximising returns is key. Times have changed So what are the factors driving consideration of active global equity strategies in DC today? 1. Tick box governance is no longer acceptable in DC a proper assessment of what is best for the members is needed. 2. Implementation technology has made it much easier to select and remove managers schemes no longer need to be stuck with underperforming managers. 3. DC schemes and members cannot afford to ignore long term added value outcomes are not governed by headline fees, they are determined by long term real returns.
Governance: Making a proper assessment Costs do matter, but it is the delivery of long term value that should be the driving force behind DC investment decisions. Trustees and sponsors of DC pension schemes should, at the very least, consider the use of active global equity strategies as part of a robust investment design and review process. The role for active global equities In self-select In the default strategy Active options A complementary approach A replacement strategy How Offer actively managed self select options Blend active and passive management as a default fund Take an active approach to the default fund Why Provide real choice for those members that want to make an individual investment decision Provide the capability to capture some long term added value within a style blended structure Capture long term added value through a well diversified active strategy Who Schemes who believe that low headline fees benefit the majority of members, but where governance capabilities allow members the option of active solutions Schemes with a fundamental belief that members should be exposed to multiple investment styles over the long term Schemes that believe the long term added value of active management can outweigh the initial lower headline fees of index investing and have the governance structures to manage this Developments in technology Historically many DC schemes have directly appointed one or more fund managers. Over the subsequent years the limitations of this approach have become clear; not least that significant costs can be incurred when a scheme wishes to change its fund managers. The development of open architecture fund platforms in DC has made it far easier for Trustees and sponsors of DC schemes to select and deselect fund managers without incurring prohibitive costs. Trustees and sponsors of DC schemes no longer need to settle for passive management due to concerns over their ability to manage (or change) their choice of active managers if required.
Long term value Numerous recent surveys highlight the fact that current levels of DC pension contributions are unlikely to be sufficient to meet the pension expectations of members. While it is the case that investment solutions alone cannot be the answer, such analysis does emphasise the importance of DC members exploiting all possible sources of return available to them. The charts below demonstrate that achieving even relatively modest excess return ambitions over the index can result in significant additional returns over the long term. Market Index Return p.a. Traditional index approach Potential added value from active management 7% 7% 7% Investment Costs p.a. 0.15% 0.65% 0.65% Excess Return Ambition p.a. 0% 1% 2% Actual Return p.a. 6.85% 7.35% 8.35% Pension 000 s p.a. Starting at 30 Starting at 40 25 20 15 10 5 0 0% 1% 2% 0% 1% 2% Excess return ambition Assumed: Entry Salary 20,000 p.a.; 11% p.a. contributions Salary increases at 2% p.a. Retirement at age 65 Male member with 50% spouses pension No probability of death before age 65 Source: Schroders, for illustration only.
Active Global Equity Solutions We believe that high quality active global equity strategies have the potential to unlock important additional returns for DC members, who until now have relied on passive global equity funds. Stephen Bowles Head of Defined Contribution, Schroders Two distinct approaches We recognise that DC schemes have different needs and objectives, therefore Schroders can offer two distinct approaches to managing active global equities. By offering two approaches, Trustees and sponsors can incorporate these strategies in a number of different ways. The QEP 1 Global Equity funds provide a viable alternative or complement to passive global equity, particularly within a default strategy. The Global and International Equity funds can form part of a blended global equity solution, which could be used as an allocation within a default strategy or offered on a stand alone self-select basis. Although all the options are managed in very different ways they are consistent in aiming to deliver excess returns whilst managing market risk. Further details of the two approaches are provided overleaf. By offering two approaches we are able to offer Trustees and sponsors of DC schemes a number of different ways in which active global equities can be incorporated into their DC schemes. All of the options are designed to deliver excess returns whilst managing market risk. All of the products are actively managed. 1 Quantitative Equity Products.
Global and International Equity Team led by Virginie Maisonneuve The Global and International Equity Team offers a range of equity strategies defined by the belief that superior excess returns are achievable through in-depth fundamental research, which focuses on a company s long term value and incorporates a coherent macroeconomic and thematic road map. Global and International Equity Products In self-select In the default strategy Active options A complementary approach Global Climate Change Global Demographics Global Alpha Plus Global Equity Alpha Philosophy + Invests in companies benefiting from efforts to accommodate the impact of climate change. + Investments are driven by a strong belief to help climate change by creating profitable investment opportunities for smart companies. + Invests in companies whose future earnings are positively impacted by demographic trends, through exploiting market inefficiencies at both ends of the demographic spectrum. + Utilises Schroders unique in-house demographics database. + Invests in companies in less developed markets worldwide to provide capital growth over the long term. The fund is unconstrained by size, sector or region. + A proven process looking at stock opportunities on a truly global basis, using fundamental research. + Invests in reasonably priced quality growth companies that demonstrate a sustainable competitive advantage. + A concentrated, fundamental researchdriven approach, aimed at delivering strong outperformance over the longer term. Inception June 2007 November 2010 April 2010 July 2005 Performance target Varies Varies Varies 3.5% 4.5%
QEP Global Equities Team led by Justin Abercrombie The QEP 2 Global Equities Team offers a strategic investment approach that is designed to capture the best opportunities from a global universe of over 15,000 stocks. The team s innovative range of strategies caters for a range of return budgets and risk appetites. By combining high conviction, active management with exceptional diversification (strategies invest in over 400 stocks at any one time), the funds offer investors exposure to a truly broad range of potential opportunities while minimising the stock-specific risk. Over the last 15 years the team, which is based in London and Sydney, has built an enviable track record, and currently manages in excess of 14 billion of behalf of clients around the world. QEP Products In the default strategy A complementary approach A replacement strategy QEP Global Quality QEP Global Value QEP Global Blend QEP Global Core Philosophy + Invests in companies which are profitable, stable and financially strong, while avoiding more glamorous stocks with less sustainable growth prospects. + Exceptional diversification (400+ stocks) reduces stock-specific risk. + Offers investors higher long term returns than the wider market, with lower risk. + Targets higher long term returns by investing in companies whose long term prospects are not reflected in current valuations. + Exceptional diversification (500+ stocks) reduces stock-specific risk. + Targets higher long term returns by investing in a combination of Global Value and Quality stocks, which both offer long term outperformance, but at different stages of the economic cycle. + Exceptional diversification (800+ stocks) reduces stock-specific risk. + An enhanced index strategy targeting consistent outperformance with minimal risk relative to the benchmark. + Exceptional diversification (500+ stocks) reduces stock-specific risk. Inception October 2007 October 2004 October 2007 January 2000 Performance target 3+% p.a. 3 3+% p.a. 3 3+% p.a. 3 1+% p.a. 3 2 Quantitative Equity Products. 3 Performance target is in excess of MSCI World Index.
Trusted heritage Advanced thinking Schroders is an independent, dedicated asset manager with a strong heritage and culture based on over 200 years experience of investment markets. Listed on the FTSE 100, we benefit from a strong balance sheet and a stable ownership structure, which allows us to focus entirely on delivering results for our clients. With 204.8 billion under management and an international network spanning 32 offices in 25 countries, Schroders has the perspective and expertise to identify major investment potential wherever it is located. Source: Schroders, at 30 June 2011 Contact us Contact our dedicated DC team to discuss the ways in which we may be able to add significant value for your DC scheme and its members. Stephen Bowles Head of Defined Contribution Tel: +44 (0) 20 7658 4916 Email: stephen.bowles@schroders.com Tim Horne Defined Contribution Investment Solutions Manager Tel: +44 (0) 20 7658 4877 Email: tim.horne@schroders.com Lauren Juliff Institutional Business Development Tel: +44 (0) 20 7658 4366 Email: lauren.juliff@schroders.com Hilary Vince Institutional Business Development Tel: +44 (0) 20 7658 6000 Email: hilary.vince@schroders.com Schroder Pension Management Limited 31 Gresham Street, London EC2V 7QA, United Kingdom Tel: +44 (0)20 7658 6000 Email: ukpensions@schroders.com Visit www.schroders.com/definedcontribution Important information: This brochure is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Pension Management Limited does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 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 un-audited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. The Company is not managed in order to qualify for UK distributor status. It may not meet the requirements of investors subject to UK taxation. 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. 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. Exchange rate changes may cause the value of overseas investments to rise or fall. Potential investors should be aware that investment in global equity markets involves a degree of risk and should be regarded as a long term investment. The data shown in this brochure represents past performance achieved for the global equity composite. There is no guarantee that this performance will be repeated. For the purposes of the Data Protection Act 1998, the data controller in respect of any personal data you supply is Schroder Investment Management Ltd. Personal information you supply may be processed for the purposes of investment administration by the Schroder Group which may include the transfer of data outside the European Economic Area. Schroder Investment Management Ltd may also use such information for marketing activities unless you notify it otherwise in writing. Issued in August 2011 by Schroder Pension Management Limited, 31 Gresham Street, London EC2V 7QA. Registration no. 5606609 England. Authorised and regulated by the Financial Services Authority. w40054