For professional investors or advisers only Schroders Defined Contribution Services Advanced pension products
Experience and advanced thinking Schroders has significant experience of managing DC assets and of helping scheme managers, trustees and sponsors to operate pension schemes efficiently. Currently we manage 1.1 billion of assets for 70 DC pension schemes in the UK and have relationships with 9 institutional investment platforms*. Our DC service is founded on innovative investment management, leveraging the full scale and diversity of our investment capabilities. This is backed up by a high level of service to ensure the successful implementation and ongoing management of pension schemes. We aim to work closely with all of the parties involved in a scheme, from the sponsor, trustees, pension department and advisers, through to the members themselves. *Source: Schroders, at 31 March 2010. 1
Targeting better pension outcomes Schroders advanced investment solutions for defined contribution (DC) pension schemes are designed to help scheme members achieve better pension outcomes. We offer a broad range of investment strategies that address the key requirements for growth and protection against pension conversion risk, while acknowledging that the specific aims and risk appetites of individual scheme members will differ. The potential application for Schroders investment strategies: Younger members focused on growing retirement savings Members seeking growth with reduced volatility Members close to retirement Specialist active equity Managed balanced UK government debt Diversified equity Diversified growth Corporate debt Quantitative equity Cash This brochure focuses on two of these strategies which we believe should have broad appeal and relevance to the members of most DC schemes. Quantitative equity An investment process which captures the best insights of our fund managers, combined with advanced quantitative analysis. Undertaken on a global basis the objective is to deliver strong consistent equity performance over the long term. Diversified growth A philosophy to investing, which is based on the premise that it is no longer necessary to rely on one asset class to deliver long-term growth. We have developed growth strategies which seek to combine a wide range of investments to provide long-term returns with lower levels of volatility. 2
Why new DC solutions are required Most DC schemes still feature a one size fits all default option. The default option is often viewed by scheme members as an implicit recommendation, which is reflected in an 81% take up rate*. We believe that it is unrealistic to expect that the take up rate for default options will fall by much from current levels any time soon. This means it is very important to ensure that the default element of a DC scheme is as well designed as it can be. The most common default option offered by DC schemes for the accumulation stage is a passive global equity fund. For those funds which provide an active default option, the prevalent choice is a balanced managed fund from an insurance provider. Neither is likely to be optimal. Passive equity solutions can shackle investors to the dead weight of a marketcap weighted index. This can lead to concentration risk, over-allocation to mega caps, restricted exposure to less developed markets and a structure which forces you to buy high and sell low. Active managed balanced solutions fail to fully exploit the benefits which come from broad diversification across asset classes sometimes referred to as the only free lunch in investment. There are funds which describe themselves as balanced, implying they are well diversified, which are anything but, focusing exposure on a single equity or fixed income asset class. Another issue is that, typically, default options do not accommodate the potential to improve pensions outcomes by changing the balance of investments held by a scheme member through the accumulation stage. The same solution is offered whether you are 25 or 50. This is compounded by the fact that studies have shown that once a scheme member has selected an investment option they are very unlikely to switch at a later date. Higher risk investments can be appropriate for younger scheme members far from retirement, whereas those approaching the protection stage later in their careers may be better served by a lower volatility portfolio. Schroders outcome orientated investment strategies can go some way to managing this risk when implemented individually, but offer a powerful solution when combined within a lifestyle strategy. *Source NAPF 2009. 3
Strategy focus: Diversified growth Stakeholders in DC schemes are aware of the importance of growing savings through investing in inflation-beating asset classes. Traditionally, equities have been seen as the most appropriate investment for achieving significant real returns over the longer term. Many of the traditional investment products offered to members have sought to diversify the risk associated with a single equity market (e.g. the UK) through the creation of global equity investment funds. Much of the design focus has fallen on what proportion of UK and overseas markets might form the most efficient portfolio. Unfortunately, the last few years have reminded us of some important investment lessons: equities may or may not deliver attractive growth; in a bear market, the influence of global equity markets on one another tends to increase dramatically and a shock can lead to markets falling at the same time. Consequently, overseas equities may not be the diversifier to UK equities that is required. In addition, there are behavioural aspects of investing to consider: investors do not like losing money. The fact that stock markets around the world are down in value is not a comfort to those with less money in their pension fund; adding further investment options creates difficult choices and puts off many investors. In response to all of these issues we developed the Schroder Diversified Growth Fund. 4
Schroder Diversified Growth Fund The Schroder Diversified Growth Fund is an actively managed unitised fund that aims to generate returns above inflation with reduced volatility. Specifically, the fund aims to deliver medium-term growth with a target of RPI plus 5% per annum, over a period of five to seven years and to achieve this target with a lower volatility than an equity portfolio. The portfolio balances a broad range of traditional and alternative sources of return and risk including: Equities Private Equity High Yield Debt Emerging Market Debt Property Absolute Return/Hedge Funds Infrastructure Commodities Currency The use of alternatives is an integral part of the fund s investment strategy, providing diversification and reducing volatility. Illustration of typical asset allocation Equities 52% Emerging Market Bonds 14% High Yield Bonds 11% Commodities 11% Hedge Funds 5% Infrastructure 2% Property 2% Private Equity 1% Cash 2% Source: Schroders, for illustration only. 5
Who is the fund appropriate for? The Schroder Diversified Growth Fund is suitable for any DC scheme member seeking long-term returns that are in excess of inflation, although please note there is no guarantee that returns in excess of inflation will be achieved. The fund can be incorporated into a default lifestyle strategy in place of traditional global equity and balanced funds or can be offered as a freestyle investment option. The fund also has the capacity to act as a building block within bespoke lifestyle strategies or blended fund solutions. Whichever way the fund is incorporated into the pension scheme design we believe that it will be relevant to a wide variety of DC scheme members at different stages of their working lives. Approaching retirement Just starting out Becoming more aware of their retirement position The fund offers strong growth potential and the comfort of a defined growth target The fund offers a well diversified portfolio against which other investment decisions can be taken The fund s aim of reducing volatility compared to equity and other types of investment can provide some comfort about likely savings at retirement. However, please note that this investment is not suitable for an investor seeking complete capital protection or for an individual seeking to hedge out annuity conversion risks 6
Strategy focus: Quantitative equity For DC schemes that wish to maintain an equity bias within their default investments, Schroders has developed a range of index relative and unconstrained quantitative global equity strategies. These strategies offer the potential to enhance the risk-return dynamics of equity investing, relative to both traditional active and passive equity funds. The strategies are managed by our well-established Quantitative Equity Products team. Global Active Value These strategies include: Global Active Value is an index unconstrained, highly diversified, value-driven investment strategy. Academic evidence dating back to the 1920s supports the idea that value strategies can deliver strong results over the long term. We believe that long-term investors in the strategy should be rewarded with returns of 3-4% per annum (gross of fees) above the MSCI World Index (net dividends reinvested) over the full economic cycle i.e. 5 years. The strategy is truly global, selecting investments from a universe of over 15,000 stocks in 40 countries. We only invest where we find value. If we cannot find cheap stocks in a particular country we prefer to take the long-term view and hold a zero weighting. The portfolio typically contains more than 500 stocks, which gives us scope to capture the value premium while keeping stock risk at a low level. By weighting stocks based on their fundamentals and liquidity, we avoid concentration in mega-cap stocks which can create issues for other value investors. We keep trading costs to a minimum by tailoring our approach to local market conditions and using advanced portfolio construction techniques. Global Quality Global Quality is an index unconstrained, highly diversified, modern growth alternative to the traditional value style. We believe that this strategy can provide competitive risk adjusted results for long-term investors with potential to achieve returns of 2-3% per annum (gross of fees) above the MSCI World Index (net dividends reinvested) over a full economic cycle i.e. 5 years. Global Quality invests in very different stocks to those associated with value based strategies, offering strategic diversification benefits. We aim to invest in profitable companies that are financially strong and offer stable growth while avoiding glamour stocks with attributes such as high volatility and excessive trading activity, which tend to perform disappointingly over the long term. 7
Value Quality The strategy is truly global, selecting stocks from a universe of over 5,000 stocks with a market capitalisation of more than US$1 billion. We only invest where we find genuine quality, which means that the portfolio does not overemphasise sectors which are generally characterised by growth and quality attributes such as pharmaceuticals and technology. The portfolio typically contains more than 300 stocks, providing extremely broad diversification. We keep trading costs to a minimum by tailoring our approach to local market conditions. Global Blend Global Blend combines our Global Value and Quality equity strategies in a single portfolio. The benefit of a blend is that it combines two strategies which provide the prospect of outperformance over time but at different stages of the economic cycle: Value which offers higher long run returns and Quality which performs particularly strongly during periods of heightened risk aversion such as when investors start to anticipate a recession. Combining these two complementary strategies together produces a well balanced portfolio. Both strategies share a consistent philosophy of diversification whilst avoiding the long run return drag typically associated with benchmark constrained approaches. We believe a 50:50% blend of Global Active Value and Global Quality can achieve a long run return of 3% per annum (gross of fees) above the MSCI World Index (net dividends reinvested) over the full economic cycle i.e. 5 years. The strategic allocation to Value and Quality is determined by the investment time horizon. Value strategies have historically generated stronger returns over longer periods of time but can be more volatile, particularly during cyclical downturns. Investors with a short-term horizon, or who are less confident about the future, may want a higher weight to Quality. A strategic allocation for investors with a medium-term horizon would be 50:50% Value/Quality. Who are the strategies appropriate for? Schroders quantitative strategies described above are genuinely unconstrained. They do not rule out markets or stocks that are not in the benchmark. This approach provides a high degree of investment freedom within a risk constrained framework, creating more opportunity for DC scheme members. As many DC scheme members are significantly undersaved their pension investments must work hard for them which is why Trustees and plan sponsors should consider unconstrained strategies as part of a scheme s design. They can unshackle DC members from the dead weight of being chained to a benchmark. These strategies can be incorporated into a default lifestyle strategy in place of traditional global equity and balanced funds or can be offered as freestyle investment options. 8
Investing with Schroders Schroders range of pooled life funds for DC schemes combines flexibility and choice. The funds can be used for single lump sum premiums, such as those that might be associated with a scheme transition, or for investing regular monthly contribution flows and new scheme implementations. All of the capital and income due to investors is included in a single unit price. The funds allow daily dealing and are daily priced, with all deals settled four days after the deal date. The full range of funds can be accessed on a direct basis via Schroder Pension Management Limited, Schroders Life Company subsidiary. A growing selection of our funds can also be accessed on many of the well known institutional investment platforms and insurance company based bundled pension products. Personalised account service We appoint a dedicated team to support each DC scheme, generally consisting of an account manager and account executive. They are responsible for providing a personalised service to the scheme, covering all aspects of investment and scheme administration, drawing on the wider resources of the Schroders Group. We also offer a comprehensive package of communication and education materials to meet the unique needs of each scheme s members. We are happy to work with a scheme to create personalised member communication materials across all forms of media.
SCHRODERS DEFINED CONTRIBUTION SERVICES 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 167.9 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 31 March 2010. Schroder Pension Management Limited 31 Gresham Street London EC2V 7QA United Kingdom Tel: +44 (0)20 7658 6000 Email: ukpensions@schroders.com www.schroders.com/ukinstitutional For further information Stephen Bowles Head of Defined Contribution Tel: +44 (0) 20 7 658 4916 Email: stephen.bowles@schroders.com Lauren Juliff Institutional Business Development Tel: +44 (0) 20 7658 4366 Email: lauren.juliff@schroders.com 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 as an offer or solicitation for the purchase or sale of any financial instrument. 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. 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. Issued in June 2010 by Schroder Pension Management Limited, 31 Gresham Street, London EC2V 7QA. Registration no. 5606609 England. Authorised and regulated by the Financial Services Authority. w34722