Q&A roadshow 2016
What is a Strategic
Credit Fund?
For professional advisers only. This material is not suitable for retail clients
Peter Harvey | Fund Manager
Questions
What is a Strategic Credit Fund?
What is your view on high yield debt?
Where are the opportunities in high yield debt?
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Schroder Strategic Credit Fund
Credit fund, with a total return objective (Libor +3% p.a. over medium term)
Flexible combination of high yield and investment grade debt
Structurally low interest rate duration
Majority UK and European issuers
GBP base currency; Euro and USD hedged share classes
£1.3bn combined strategy, launched April 2006
Fund Manager: Peter Harvey since launch
2
Source: Schroders as at 31 May 2016. Source for fund rating: Rayner Spencer Mills, Square Mile as at 31 March 2016
Effective interest rate duration
Schroder Strategic Credit Structurally low duration
3
Source: Barclays Point/Schroders, Option-Adjusted Duration from Barclays Point, 30 April 2016
0
1
2
3
4
5
6
7
8
Schroder Strategic Credit Barclays Euro High Yield Barclays Global High Yield Barclays £ credit
Net rating exposure
4
Notes: Schroders FIA, data as at 30 April 2016
Investment Grade Non Investment Grade
Average of Moody’s, Fitch and S&P
Contribution to spread duration (bps)
0.0 0.1 0.1
0.8
1.3
0.8
0.1
0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
AAA AA A BBB BB B CCC Unrated
Investment Grade Non Investment Grade
Average of Moody’s, Fitch and S&P
Largest issuers – Below A
5
Notes: Schroders FIA, 30 April 2016; * Asterisk indicates the position is mainly or entirely senior secured holding. Bonds rated below A- as per the average rating of Moody’s, S&P and Fitch. The
securities shown are for illustrative purposes only and not a recommendation to buy or sell shares
Issuer Sector MV (%)
Virgin Media* Cable & Telecom 3.2
Numericable* Cable & Telecom 2.6
Tesco Supermarket 2.1
Ardagh* Packaging 2.0
Jaguar Land Rover Automotive 1.8
Unity Media* Cable & Telecom 1.7
Koninklijke Telecom 1.5
Ineos Basic industry 1.4
Infinis* Landfill Gas 1.3
IDH* Healthcare 1.3
Issuer Sector MV (%)
RBS Banking 1.3
Wind* Telecom 1.3
J Sainsbury Supermarket 1.2
Spirit* Pubs 1.2
Play Mobile* Telecom 1.2
Empark* Car Parks 1.2
Cable & Wireless Telecom 1.1
Old Mutual Insurance 1.1
First Hydro* Hydro Electric 1.1
Thames Water Utilities 1.0
Schroder Strategic Credit Fund Historical Performance
6
Source: Schroders, gross cumulative returns since inception 31 December 2007 to 31 May 2016, net income reinvested. Bid to Bid. *Benchmark is the UK 3 Month Treasury Bill. Schroder Strategic Credit was launched
on 12 March 2014 to accommodate a transfer of shareholders from the Cazenove fund to the Schroders. Prior to 12 March 2014 the fund uses the track record of Cazenove Strategic Credit Fund (launched on 4 April
2006) as a performance track record. Past performance is not a guide to future performance and may not be repeated
%
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
Apr
20
06
Jul 200
6
Oct 20
06
Jan 2
00
7
Apr
20
07
Jul 200
7
Oct 20
07
Jan 2
00
8
Apr
20
08
Jul 200
8
Oct 20
08
Jan 2
00
9
Apr
20
09
Jul 200
9
Oct 20
09
Jan 2
01
0
Apr
20
10
Jul 201
0
Oct 20
10
Jan 2
01
1
Apr
20
11
Jul 201
1
Oct 20
11
Jan 2
01
2
Apr
20
12
Jul 201
2
Oct 20
12
Jan 2
01
3
Apr
20
13
Jul 201
3
Oct 20
13
Jan 2
01
4
Apr
20
14
Jul 201
4
Oct 20
14
Jan 2
01
5
Apr
20
15
Jul 201
5
Oct 20
15
Jan 2
01
6
Apr
20
16
Fund Benchmark*
% 3yr 5yr Since Inception
Portfolio Return (Ann.) 4.6 4.8 5.4
Volatility 2.0 2.7 4.0
What is your view on
high yield debt?
High Yield Credit Spreads
270
320
370
420
470
520
570
620
670
720
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
HY – € HY – $
Eur 3 year Average: 388bp
8
Source: Schroders, Bloomberg, Data as of 31 May 2016
Over government bonds (bp)
Mergers & Acquisitions Activity US$ billion (LTM)
9
Source: Bloomberg, announced M&A transactions, last twelve months (April 2016).
0
500
1,000
1,500
2,000
2,500
3,000
Jan 00 Apr 01 Jul 02 Oct 03 Jan 05 Apr 06 Jul 07 Oct 08 Jan 10 Apr 11 Jul 12 Oct 13 Jan 15 Apr 16
US ($bn) Europe ($bn)
High Yield Net Leverage
10
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
Mar 03 Jan 04 Nov 04 Sep 05 Jul 06 May 07 Mar 08 Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15
US EU
Source: Morgan Stanley, Dec 2015; Leverage is Net Debt / EBITDA
Where are the
opportunities in high
yield debt?
Sector exposure % Net Asset Value
12
Source: Schroders FIA. Data is for year ending 31 May 2016 for the Schroder Strategic Credit fund.
Sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.
0
1
2
3
4
5
6
7
8
9
10
BBs are historically wide to BBBs European credit spread ratio
13
Source: Schroders, Bloomberg, ML, Data as of 31 May 2016
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
1.2
1.4
1.6
1.8
2.0
2.2
HY B / HY BB BB Non-Fins / BBB Non-Fins (rhs)
IG Banks cheapened up considerably during Q1
14
Source: J.P. Morgan; data as of 31 May 2016, US investment grade data.
Lower growth and dis-inflationary pulse from EM
15
Source: Bloomberg, 31 May 2016
US and UK LIBOR and EURIBOR futures
16
Source: Bloomberg, 23 May 2016. Forecast risk warning: Please see the information slide at the end of this presentation
-0.5
0.0
0.5
1.0
1.5
2.0
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20
90 day £ futures Eurodollar futures Euribor futures
Rates %
For professional advisers only. This material is not suitable for retail clients.
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. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified
before further publication or use.
This presentation 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 Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or
restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not
be placed on the views and information in the document when taking individual investment and/or strategic decisions.
The distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the mid-market unit price at the date shown. The underlying yield
reflects the annualised income net of expenses of the fund (calculated in accordance with relevant accounting standards) as a percentage of the mid-market unit price of the fund at the date shown.
Both yields are based on a snapshot of the portfolio on that day shown. They do not include any preliminary charge and investors may be subject to tax on distributions. This fund invests partly or
wholly in bonds and thus will tend to be less volatile than funds that invest in pure equities. However, the capital value of a bond fund and the level of its income will still fluctuate. This fund invests
partly in higher yielding bonds which will be issued by borrowers with lower credit ratings. Such bonds will have a greater risk of default by the lender and the incidence of such risk may have a
negative impact on income and capital value. The fund may extensively use derivative instruments and forward transactions to meet its investment objectives. Further information on the risks
associated with derivatives and the risks associated with the fund can be found in the full Prospectus and Key Investor Information document. The levels and bases of tax assumptions may change.
Forecast risk warning: The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own
assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts
and assumptions may be affected by external economic or other factors
Source for ratings: Rayner Spencer Mills and SquareMile as at 30 April 2016
Issued in June 2016 by Schroder Unit Trusts, 31 Gresham Street, London, EC2V 7QA. Registered no. 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK10794
Important information
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15/06/2016 09:58:17