A primer on securitisation - Schroders - Schroders · ABS, MBS, CMBS...it’s all about the backing...
Transcript of A primer on securitisation - Schroders - Schroders · ABS, MBS, CMBS...it’s all about the backing...
A primer on securitisationOctober 2019
For financial intermediary, institutional and consultant use only. Not for redistribution under any circumstances.
ABS, MBS, CMBS...it’s all about the backingWhat we refer to as securitised debt is known by many names: structured products, structured finance, securitised credit, or it can be known by its acronyms, ABS, MBS, CMBS, and CLO1 to name a few. With this many monikers, it’s no wonder that this area of finance is considered more complex than ‘traditional’ fixed income.
Truth all told, we chose the term “securitised” because it contains the word “secure” and we think that the secured nature of the debt is one of the most important features of the sector. We often think of securitised debt as benefiting from three pillars: collateral (secured nature), structure (credit protection) and amortization (of the underlying debt).
1 Asset-backedsecurities(ABS)aresecuritiesbackedbycashflowsfromreceivablesorloanssuchasautomobileloans,creditcardreceivablesorstudentloans.Mortgage-backedsecurities(MBS)aresecuritiesbackedbycashflowsfromresidentialmortgageloans.Commercialmortgage-backedsecurities(CMBS)aresecuritiesbackedbycashflowsoncommercialmortgageloans.Collateralizedloanobligations(CLOs)aresecuritiesbackedbycashflowsfromcorporateloans.
Michelle Russell-Dowe HeadofSecuritisedCredit
Introduction
Securitiseddebtisbackedbyfinancialcontracts.Forexample,autoABSarebackedbyloanssecuredbyautomobiles.Astheloansarerepaidbytheborrowers, thepaymentsareforwardedtothesecuritisationtrust andusedtorepaytheABSbondsthathavebeenissued.Thesecuritisationtrustisakeyconceptwhichwewilldiscussfurtherinthisprimer,butthetrustitselfisa vehiclesetuptoowntheloansandtoissuethedebt.
The“security”fortheABSdebtistwo-fold:first,theprimarysecurityisthefinancialcontract,orloan,whichprovidesthattheborrowerrepaytheirdebt.Second,itiscommonthatthefinancialcontractcontainstermswhichprovidesforrecoursetocollateral(inthiscase,theautomobile)shouldtheborrowerceasemakingpaymentsasrequiredbytheautoloancontract.Thesetwocomponentsrepresentthe“secured”and“collateralized”natureof thedebt,whichisourfirstpillar(wewilldivedeeper intotheothertwopillarslaterinthepaper).
Size is a surprise; the consumer debt, housing debt and real estate debt are large markets.Consumerdebt,realestatedebt,andcommercialandresidentialmortgagedebt,areallsubstantial,sizablemarkets.Figure1helpsillustratethispointasthereisawideuniverseofdebts thataresecuritised.Ontheconsumerside,thereareautoloans,cellphoneloans,mortgageloans,studentloans,personalloans,creditcardreceivablesandevenpeer-to-peerlending.Aswell,thereareloansthatfaceabusinessratherthanaconsumer;theseareoftencommercialrealestatemortgageloans,smallbusinessloans,equipmentleases,cellulartowerloans,solarpowerpurchasecontracts,insurancelinked-securities,orevenleveragedloans.Thisdiversitymeansthattheuniverseislarge. Theoutstandingcurrentfacevalueof“securitiseddebt” globallyis$12.9trillion.Thismakesitoneofthelargestdebtmarketsoutstanding.
Thebreakdownofthissizablemarketoffersinsightintowhythereisvaluetobefoundwithinandacrossthesecuritisedmarkets.
Asubstantialcomponentoftheglobalsecuritisedmarketisthe$8trillionmarketthatisguaranteedbyFannieMae,FreddieMacandGinnieMae.TheUSmortgagemarkethasmorethan$11trillionindebtoutstandingandthegovernmentguaranteesaboutthreequartersofittoensureaccesstofinancing.Thisgovernmentguaranteedmortgagemarket(AgencyMBS)istheportionofthesecuritiseddebtmarketthatisrepresentedas“securitised”intheBloombergBarclaysGlobalAggregateIndexuniverse,amajorbenchmarkforinvestors.AgencyMBSisclearlyamajorcategoryofdebt,anditoffersadifferenttypeof“high-grade”riskpremiumthantheriskpremiumthatisofferedbycorporatedebt.Ithasvalueasadiversifyingsourceofreturnandasariskmitigating,guaranteeddebtwithprincipalprotectionsimilartoTreasurynotes.TheprincipalriskthatAgencyMBScompensatesinvestorsforisprepaymentrisk,orthe riskthataUSmortgageborrowerrefinancestheirhigherratemortgagewheninterestratesdecline.
TheSecuritisedComponentoftheBloombergBarclaysGlobalAggregateIndexisprimarilyAgencyMBS.Assuch,itexcludesmostofthe$4.5trillioninsecuritiseddebtthatisnotAgencyMBS.MostABS,non-agencyMBS,CMBS,CLO,EuropeanMBS/ABSandAustralianABS/MBSarenotincludedintheindex.Therefore,thesesecuritiseddebtsaregenerallyregardedasout-of-benchmarkexposures.Asout-of-benchmarkexposures,indexbuyersarenotrequiredtobuythesesecuritiesandETF’sthatreplicatetheindexwouldnotincludethem.Theseexposureshavetypicallybeenembracedbymanagerswithsignificantresourcesandwithhistoriesinmanagingthesespecific,research-intensiveassets,andinaformataccessiblemainlybylargerinstitutionalinvestors.Withoutanaudiencefrompassiveinvestors,wethinkthesecuritiestypicallyexcludedfromtheindexofferattractivereturnwithouttakingonadditionalrisk.
Figure 1: Securitisation is a sizable market, comprised of diverse asset classes
Global Securitised
$12.9 trillion
US Securitised
$11.4 trillion
US Agency guaranteed
$8.4 trillion
Agency CMBS
$0.6 trillion
Agency MBS
$7.8 trillion
US Non-guaranteed
$3.0 trillion
ABS
$1.0 trillion
MBS
$0.8 trillion
CMBS
$0.6 trillion
CLO
$0.6 trillion
Non US Securitised
$1.5 trillion
In Bloomberg Barclays Global Aggregate Index Majority excluded from the Bloomberg Barclays Global Aggregate Index
Source:Schroders,SIFMA,Fed,BarclaysasofJune2019.
3A primer on securitisation
Figure2showsthatthereismorethan$3trillionofsecuritiseddebtsoutsideoftheAgencyMBSmarketinaggregate,asubstantialout-of-benchmarkopportunityset.
Figure 2: US securitised aggregate issuance by high level category (ex Agency MBS)
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ABS MBS CLO CMBS AgencyCMBS
CDO
USD billions
Source:SIFMA,SchrodersasofDecember31,2018.
Thereisaverydiversesetofdebttypes,asshowninFigure3below,thataninvestorcanaccessthroughthesemarkets,offeringatremendousadvantageinmakingselectionsofsectorsandsecuritiesthathavebetterfundamentalsupport.
Figure 3: Outstanding debt (excluding agency guaranteed)
USD billions
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406
167 155 137 126 112 109 10871 62 62 55 44 30 22 18 16 13 12 9
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Source:SIFMA,SchrodersasofDecember31,2018
Aswell,annualissuanceisquiterobustacrossthesesectors,offeringamplesupply.Figure4showsthatevenafterexcludingAgencyMBSthereiscloseto$600billioninannualissuance intheUSsecuritisedmarkets.
Figure 4: US securitised 2018 issuance by high level category (ex Agency MBS)
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ABS MBS AgencyCMBS
CLO CMBS CDO
USD billions
Source:SIFMA,SchrodersasofDecember31,2018.
Figure5showsthenearly$600billioninannualissuancefrom2018wasalsodiversifiedacrosssectors.
Figure 5: 2018 debt issuance (excluding agency guaranteed)
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Source:SIFMA,SchrodersasofDecember31,2018.
Themostgranular,datarich,sectorsarealsothelargest:MBS,orsecuritiesbackedbyresidentialmortgageloans,autoloan-backedsecurities(prime,near-primeandsub-prime),CLOsandCMBS, orsecuritiesbackedbycommercialrealestatemortgagesall offerthemostextensiverangeofopportunities.Itisdifficult toaccessthistypeofdebtexposurethroughthecorporatebondmarketortheequitymarketwithoutalsotakingonthebusinessriskofbankornon-banklendersorretailers.So,withaprincipalfocusontheconsumer,onhousingandoncommercialreal estate,thesecuritisedmarketoffersdiversificationtotraditionalcreditexposure.
A primer on securitisation4
Figure6highlightstheissuanceofABSdebtbackedbytheconsumer,housingdebt(MBS)andcommercialrealestate debt(CMBS).
Figure 6: 2018 ABS issuance excluding agency, $592 billion
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ABS-Consumer
MBS CLO CMBS ABS-Other CDO
USD billions
Source:SIFMA,SchrodersasofDecember31,2018.
InadditiontotheseUSmarketsthereisaroughly1.2trillionEuronon-USsecuritiseddebtmarket,equivalentto$1.5trillioninUSdollars.So,notonlyisthereasubstantialdiversificationacrosssectorsandtypesofdebt,thereistheabilitytoaccessregionaldiversification.Figure7illustratessecuritiseddebtbycountry.
Figure 7: Issuance by country
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Source:SIFMA,SchrodersasofDecember31,2018.
Asshowninthepiechart(Figure8),RMBS,orresidentialmortgage-backedsecurities,dominatestheEuropeanandAustralianmarkets.ThisRMBSexposureinEuropeandAustraliaisnotguaranteedandisaparalleltotheUSnon-agencyMBSmarket.TheacronymsRMBSandMBSareoftenusedinterchangeably,whereascommercialmortgage-backedsecuritiesarealwayscalledCMBS.
Figure 8: European and Australian percent of outstanding issuance by sector
4%
58%
9%
18%
RMBS
By sector
6%
5%
ABS
CLO
Small business
Whole business
CMBS
Source:SIFMA,SchrodersasofDecember31,2018.
Thesumofalloftheseglobalsecuritisedmarketsisaninvestmentuniversethatisextraordinarilylarge,diverse,andonethatallowsforexcessreturngenerationasitisnotaformalportionofthelargest,more“traditional”fixedincomeindices.Fromacreditworthinessperspective,thesecuritisedopportunityspansfromthehighestgrade(AAA,governmentguaranteed),tohigher-yielding,below-investment-gradeopportunities.Assuch,thereisawiderangeofinvestmenttoolsthatcanbecalledontocreatelowrisk,lowvolatilitystrategies,orinvestmenttoolstotakeadvantageofcreditopportunities.Thewiderangeofoptionsalsooffersacompellingcaseforusingdifferentinvestmentsoverthecourseofacreditcycletomanagecreditrisk.InFigure9onthenextpage,weillustratetherelativeattractivenessofreturnbyratingofsecuritisedsectorsversusothertraditionalfixedincome.Forexample,someAAAratedclassesinABSandMBSearnasimilarreturnascorporatesecuritiesratedtwocategorieslower(single-A).
5A primer on securitisation
Figure 9: Superior return (yield) per unit of risk relative to many traditional sectors
Government Securitised/Secured finance Corporate US Municipals Emerging Market Debt
Credit Quality
US Treasury
Agency MBS
Agency CMBS
Corp
Corp
Corp
Muni
Auto ABS
Container Lease
Aircraft Lease
Auto ABSABS
RMBS
CMBSLeveraged Loans
EMD Sov
EMD Corp
AAA AA A BBB HY
CMBSRMBS
Comm. Bridge Loans
Comm. Mezzanine Loan
Non-US CMBS Non-US MBSNon-US CMBS
CLO Senior
CLO
CLO EquityTrade Receivables
CRT
CRT
Non-US MBS
Resi. Rental LoanCLO
0%
2%
4%
6%
8%
10%
Yield to worst (%)
Circlesizerepresentssizeofmarket.Forillustrativepurposesonlyandshouldnotbeviewedasarecommendationtobuyorsell.Source:Bloomberg,SIFMA,asofAugust31,2019.Basedon5yeardurationequivalentyieldtoworstforindexproxiesofeachassetclass.Pastperformanceisnoguaranteeoffutureresults.Yieldscanfluctuateovertime.
Inadditiontothediversityofcollateralbackingsecuritiseddebt,eachsegmentoffersawiderangeofdebtmaturitiesaswell.Thisenhancesamanager’sabilitytocopewithavarietyofyieldcurveenvironments.Usingthecurrentenvironmentasanexample,theyieldcurveisveryflat,andhasevenbeenslightlyinvertedearlierthisyear.Theamortizingnatureofmanyconsumerdebts(mortgage,auto,etc.)isthereforeattractivetodaygiventheflatyieldcurve.Inthisflatyieldcurveenvironmentinvestorsarenotpaidadditionyieldtoextendoutthematuritycurve,noraretheyofferedadditionalyieldspreadfortakingonlongerexposures.Assuch,maximizingyieldandspreadreallyoccursatthe3-yearpointintheyieldcurve,wherealotofABScashflowssit.Withtheshortermaturityprofileandlimitedcontributionofrolldowntosecurityreturn,ABSlookattractiveinaflatyieldcurveenvironment,liketoday.However,theamortizingnatureofABSdebtisvaluableeveninotherenvironmentsforafewreasons:itoffersliquiditythroughpaydowns,itoffersareductioninriskexposure(theoutstandingdebtdeclinesasthedebtgetsclosertomaturity),anditoffersshortermaturityoptionswhichminimizevolatilitywithalowerexposureto“spreadduration”.
The second pillar: looking at the benefits of a securitisation trust and structureOursecondpillarofsecuritisationis“structure”.Whenwerefertostructureitmeansthepriorityofpaymentsthatthesecuritisationusestopaythedebtissuedbythesecuritisationtrust.Butlet’sstopthereandtalkabouttheimportanceofthesecuritisationtrustastheissuerofthedebt.Securitisationwasbuiltsothattheassets,ortheloanssoldtothetrust/issuer,couldberelieduponaspaymentfordebtregardlessofwhathappenedtotheloanoriginator.Thisindependencefromthecorporateriskoftheloanoriginatorisakeyconcept;itmakestheloans,orassets,remotefromthebankruptcyriskofthelender.Thisprotectsinvestorsfromthemoreidiosyncraticnatureofcorporaterisk.Second,diversificationisanotherfeatureofsecuritisation.Securitisationpoolstheriskacrosshundreds,oreventhousandsofborrowers.Withbankruptcyremotenessanddiversificationhighlighted,wewilldiscusswithsignificantdetailoursecondimportantpillarofsecuritisationwhichisstructure,orcredittranching,(seenextpagefordiagram).
Structurecanfacilitateadditionalcreditprotection,oritcanisolateotherriskssuchascashflowtiming,orprepaymentrisk,asisdoneincollateralizedmortgageobligation(CMO)structuring.
Whatdotheseadvantageslooklike?
Figure 10: Different risk and return for different investors
Loans to many borrowers
1
2 9
3 10
4 11
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6 13
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8
Cred
it R
isk
Retu
rn
Lower
Higher
Lower
Higher
Protected by all the bonds
below
Protected by any equity inthe collateral
Pool of Loans
AAA
AA
BBB
A
BB
B
First loss
Source:Wikipedia(https://en.wikipedia.org/wiki/Tranche),Schroders.
Thediagramaboveiswhatpoolingadiversegroupofloanstogetherandissuingmultipleclassesofdebtlookslike.Thereisaspecificpriorityofpayments,typicallyfirsttothesenior-mostclassandthen,oncethatsecurityhasbeensatisfied,thenextmostseniorclassispaid.Inthiswaythemoreseniorclassesbenefitfromadditionalprotectionbeyondthefirstpillar(collateral).Therulesofpaymentandthenumberofclassescanbequitesimple,assimpleasevenasingleclassissuance,whichisknownasapass-throughcertificate.Aswell,therulesofpaymentcanalsobemorecomplex,includingclassesofvariouscreditpriority,and,classeswithvarioustimingpriority.Timingprioritycanbeusedandservedemandfromdifferentinvestortypestocreatedebtwithverycertainpaymentwindows.Theconceptofstructureallowscashflowsfromloansto
A primer on securitisation6
beusedtocreatedebtofvariousqualitiesandmaturities.Inthisway,avarietyofriskprofilescanbecreated,andsold,tooptimizethecostofcapitalforanissuer.Theimportanceofstructureis whymanypeoplerefertosecuritisationas“structuredfinance” or“structuredproducts”.
Wehavediscussedtheimportanceofthesecuritisationtrust,buttoillustratetheconcept,thesecuritisationitselfisalegalarrangementwherethedebtisissuedbyaspecialpurposevehicleoftenreferredtoasa“trust”.EvenWikipediahasadiagramonsecuritisation.Thereareseveralpartiestoasecuritisationthatmanagethecashflow(paymentrules)andtheindependenceofthetrust.Anillustrationisbelow.
Figure 12: A mortgage securitisation flow chart
Lender Borrower
MortgageBroker
Investors
Servicer
Credit EnhancementProvider
Ratings Agency
Underwriter
Trustee
Issuer
Step 2 Ȃ The Lender sells the loan to the Issuer and the Borrower begins making monthly payments to the Servicer.
Step 1 Ȃ The Borrower obtains a loan from a Lender. This may be done with help from a Mortgage Broker. In many cases the Lender and the Mortgage Broker have no further interaction with the Borrower after the loan is made.
Step 3 Ȃ The Issuer sells securities to the Investors. The Underwriter assists in the sale, the Rating Agency rates the securities, and Credit Enhancement may be obtained.
Step 4 Ȃ The Servicer collects monthly payments from the Borrower and remits payments to the Issuer. The Servicerand the Trustee manage delinquent loans according to terms set forth in the Pooling & Servicing Agreement.
Cash
Securities
Loans
Loans
Monthly Payments
Monthly Payments
Loans Proceeds
Cash
MonthlyPayments
Source:Wikipedia.
Theinitialpartiestoaloanaresimple:aborrower,alenderandapaymentcollector,oftenknownastheservicer.
Sometimesthereisabrokerthatarrangestheloanbetweentheborrowerandthelender,butthestepsflowasfollows:1)alendermakesaloantoaborrower,2)borrowermakespaymentsontheloan,3)servicercollectstheperiodicpaymentsontheloanand4)theservicerwouldwork-outtheloaniftheborrowerstoppedpaying.
Inthecaseofasecuritisation,thelendersellstheloantoatrust;therearerequiredrepresentationsabouttheunderwritingandqualityoftheloans.Thelenderisthenoutofthepictureexceptfortheserepresentations.Theservicerishiredandpaidbythetrustandcontinuestheirroleincollectingpayments.Anunderwritersetsupthetrustandunderwritesthebondissuance,oftenmakingsecondarymarketsintheissueddebt.Atrustee(fiduciary)overseesthetrustandthecashflow.Thetrustissuesdebt(bonds),whichispurchasedbyinvestorsandthetrust,makespaymentstothebondholders.Theratingagenciesassessthedebtqualitybasedontheircriteriontoprovideinformationtoinvestors.Theyalsomonitorperformance.
Figure 11: Two critical components work together to impact return, stability and liquidity
Forillustrativepurposesonly.Protectionreferstorelativecapitalstructurestanding, notanabsoluteguaranteeagainstcapitalloss.
LoansSecuritisation
Junior
Senior Protected class
Shock absorber
Collateral: The asset(s) can vary in terms of quality and cash flowStructure: Can enhance return or mitigate risk
7A primer on securitisation
So why securitise?Fromanissuer’sperspective,securitisationtypicallyoffersalowercostoffunding,oradiversifiedfundingsource,andinmanycases,theissuer’screditratingbecomeslessrelevant.Assuch,ifajunk-ratedlenderhasveryhigh-qualitydebtreceivables,theycanoftenachievemuchmoreattractivecostofcapitalthroughsellingthereceivablesthroughasecuritisation.Why?Thisistheimportanceofbankruptcyremotenessdiscussedearlier.Oncetheloansaresoldtothesecuritisationtrust,thelenderiseffectivelyoutofthepicture,theloansareseparatedfromthelender’sassetsandarenotsubjecttothelender’shigherriskofbankruptcyordefault.Butissuersdonothavetobesmaller,lowerratedcorporations.Commonissuersincludelargecompaniesaswellasgovernmententities.Examplesare:CapitalOne,WellsFargo,JPMorganChase,Ford,GeneralMotors,HarleyDavidson,GinnieMae,FannieMae,andFreddieMac.Inaddition,privatefirmslikeStarwood,Annaly,Redwood,Exeter,Blackstone,Brookfield,Fortress,andmanyothersallusesecuritisation.
Thethirdpillarrelatestocashflowfromtheunderlyingloansorreceivables;basicallywhatsupportstheamortization.Whilewehavetouchedonamortizationtwicealready,itisworthmentioningthisasadifferentiator.Manyloansprovidefortheamortizationofthedebtpriortothematurityoftheloan.Thisisquitedifferentfromthatofmostfixed-incomedebt,whichistypicallyabulletmaturity(corporatesecuritiesandsovereigndebtaretypicallybulletmaturity).Butmanyloans,inparticularconsumerloanssuchasmortgagesandautomobileloans,areamortizing.Astheloansrepayprincipal,thisprincipalisoftenusedtopaydownprincipal ontheoutstandingsecuritiseddebt.Thiscreatesadeleveraging, orde-risking,ofthedebtoutstanding,overtime.Italsocreates someliquidityovertime.
Sowithournew-foundunderstandingofthethreepillars–collateral,structureandamortization–wenowmovetounderstandingsomeofthechangestothemarket,postfinancialcrisis,andtheuseofthedebtwithinstrategiesandportfolios.
The house won’t fall if the bones are goodThesecuritisationmarketisoftenapolarizingone.Giventhemassiverunupinunregulated,andpoorlyunderwrittenconsumerdebtpriortothelastfinancialcrisis,afewinvestorsstillhaveanemotionalbiasagainstsecuritiseddebtandexcludeitwithoutregardtothechangesthathavehappenedinthesubsequent 12yearspostfinancialcrisis.
Duringthefinancialcrisis,manyinvestorsexperiencedlossesinMBSorCDOs.TheselosseswereconcentratedinCDOsandinmorejuniorMBSandCMBSexposureswhichweresmallershockabsorbingclasses.Therewerelossesin2006-2007vintagenon-agencyMBSwheresufficientborrowerincomeunderwritingwasnotdone.InvestorsthatdidnotownMBSorCDOsstillexperiencedsignificantpricevolatilitywhichhasleftalastingimpression.But,asaresultofthefinancialcrisis,therehavebeenseveralcriticalchanges.Regulation of lenders, issuers and investors has restrictedlending,improvedthequalityoforigination,andrequiredriskretention–nomore“noincome”loans.Intermediaries,suchasratingagencies,aswellasinvestors,haveamuch larger data setwithwhichtomakeperformanceassessments.Risk has been meaningfully re-priced withaconservativetiltasregulationhaslimitedbuyerslikeEuropeaninsurancecompanies.
EvenforvilifiedsectorssuchassubprimeMBS,timehasprovidedasortofhealing.Manyoftheweakerloanshavebeenliquidatedfrompools,andbecauseoflastingregulatorychange,manywell-
performingborrowershavenotbeenabletorefinance,keepingthemintheseoldervintagedebts.Ifweweretoaskyouwhatwouldyoucallaborrowerwhichhasbeenmakingconsistentpaymentsforfive,even10years.Wouldyoucallit‘sub-prime’?Wewouldn’t.Therearemanyinstancesofthisverydebtservicingadherence.Theyarenolongerreallythesame“subprime”customertheywerefiveyearsprior.Thesefactsareoftenignoredasthebabyhasbeen“thrownoutwiththebathwater”anditisoneofthekeyreasonsmanagerswithdata,experience,andskillcangeneratealphainthesemarkets.MortgageloansintheUSgenerallyhavetermtomaturityof30years.Assuchtherearemany,manyvintagesofsecuritiesbackedbyloanswithavariety ofseasoningandavarietyofborrowers.
Figure 13: Always current default rate (first time becoming 30 days delinquent)
0.00%
0.50%
1.00%
1.50%
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Jan-05 Aug-06 Mar-08 Oct-09 May-11 Dec-12 Jul-14 Feb-16 Sep-17
ALT A Prime Subprime
Source:LoanPerformanceasofMay2018.Pastperformanceisnoguaranteeoffutureresults.Yieldscanfluctuateovertime.
Butlet’stouchonthevastarrayofregulationofsecuritisationasithascreatedinefficienciesthatcreateexcessreturnopportunityandtheyhavemassivelychangedlendingstandards.Verylittle“risky”productoriginationoccursinUSmortgagespace.NINJAloans(theso-called“noincome,nojob,noassets”underwriting)areathingofthepast.
US RegulationBaselIII(rollingintoBaselIV)establishesriskweightingsandcapitalrequirementsforbanks’securitiesinvestmentsandloanbooks.Thislimitsbanks’abilitytoleveragetheseholdingsandreducesdemandfrombanksleadingtomoreattractiveyieldspreadsandlesscompetition.Aswell,theDodd-FrankWallStreetReformandConsumerProtectionActwasincrediblywide-ranging,dishingoutrulessuchas:TheVolckerRulewhicheliminatedbankpropdesktrading.Theruleestablishesstandardsformortgagelending,servicing,appraisalregulation.DoddFrankbringshedgefundsinscopeforregulation,andbringsinriskretentionrequirementsforissuersinsecuritisation.DoddFrankestablisheshigherbankcapitalrequirements,minimumcapitalcharges,maximumleveragelevelsanditincludesStructurallyImportantFinancialInstitution(SIFI)designationsforextraregulation.But,inourview,importantlyDoddFrankestablishedcriterionforincome-basedunderwritinginmortgageloansthroughthedefinitionofaqualifyingmortgage(QM)andthroughAbilitytoRepay(ATR)underwritingstandardsforallnon-QMloans.
A primer on securitisation8
European regulationTheEUCapitalRequirementsDirective(CRD)establishedtheriskretentionandduediligencerequirementsforEuropeanSecuritisationissuers;thisisanissuerrequirementtokeep“skininthegame”.BaselIII(rollingintoBaselIV)establishesriskweightingsandcapitalrequirementsforbanks’securitiesinvestmentsandloanbooks;thislimitsbanks’abilitytoleveragetheseholdingsandreducesdemandfrombanks.SolvencyIIforEuropeanInsuranceCompaniesestablishesriskweightings,(extremelyhighforsecuritisedrelativetocorporateandcoveredbonds).SolvencyIIeffectivelylimitedEUinsurancebuyingofsecuritisationcompletelypostcrisis.TheAlternativeInvestmentFundManagersDirective(AIFMD)coversEuropeanhedgefunds,privateequity,andanyotheralternativeinvestmentfirmsanditestablishedrequirementsforbuyers(EU-RR,duediligence).EUSecuritisationRegulation,ineffectfrom1/1/19establishedrulesforissuanceofSimple,Transparent,andStandardised(STS)Securitisations,anditbringsUCITS(equivalentto40-Act)vehiclesintotheriskretentionandduediligencerequirements.
Ascanbeseen,postglobalfinancialcrisis,theregulatorypendulumhasswunghardintermsofmonitoringandlimitingsecuritisationpracticesglobally.Inmanycasestheimpacthasbeenmassive;limitstolending(outstandinglendingonhomesintheUSactuallydeclinedfor10-yearspostfinancialcrisis,whileoverthesametimeperiod,outstandingnon-financialcorporatedebt,roughlydoubledinsize.Regulationofthismagnitudehaslonglastingimplications,includingcheapervaluationsforimpactedassetclassesandstrongerfundamentals.
Asset class positioningTheassetclassoffersthreeprincipalbenefits
1 Diversificationfromcorporatecredit
2 Lessrecentgrowthandbettersupply/demandbalance (lowervolatility)
3 Moreattractivevaluations(lesscrowded)
Securitisedcreditisawaytoaccessexposuretotheconsumer, tohousingandtocommercialrealestate.Thereare,ofcourse,
otherwaystogetthisaccessthroughlenders,throughREITs, forexample.However,inthiscaseyouarebuyingexposuretoon-goingbusinessmodelsofcorporations,whereasinthesecuritisedmarketyouhavedirectexposuretoaspecificpoolofloanswithouttheexposuretothecorporationorthebusinessmodel.ThinkWellsFargoCorporationversustheriskofprimemortgageloansoriginatedandsoldbyWellsFargo.Thisisquitedifferentthancorporatecredit.
USsecuritisationoffersvarietyandthereisahighnumberofunderlyingassetclasses,whichoffersawaytomanagethroughcreditcyclesgiventhediversityoftheexposures.
Figure 14: Asset cycles are not always synchronized
Offers diversification to traditional credit risk such as corporate or sovereign credit risk
Ȃ Accesstodifferentiatedconsumersectors:real-estate,financeandhousing Ȃ Diverseuniversewithwiderangeoffundamentalexposure
Peak cycle
Bottom cycle
Apartments
Office-SuburbanIndustrial property
CorporateHotel
Auto financeOffice -Major City
Luxury mallsUK residential
Luxury apartments
Low quality malls
Railcar lease
Shipping Container Lease
US residential housing
Consumer, low income (US)
Consumer, high net worth (US)
Leveraged LoansLoans
Junior
Senior Protected class
Shock absorber
Source:Schroders.Forillustrationonly.
Ourstrategiesoffertheabilitytohelpdiversifyportfolios,giventheirlowercorrelationstotraditionalfixedincomeassetreturns.Webelievethisisespeciallyimportantaswemovelaterinthecorporatecreditcycleandseemoreidiosyncraticrisk.
Figure 15: Securitised strategies have low correlation to various asset classes, including other ‘floating rate’ sectors
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BloombergBarclays USAggregate
BloombergBarclays US IG
Corporate
BloombergBarclays US
MBS
BAML US HighYield
S&P 500 JPM EMBIGlobal
JPM CLO BBBIndex
BloombergBarclays Int.Govt/Credit
S&P PerformingLoans
Enhanced Securitised USD LIBOR (Gross) Enhanced Securitised Plus USD LIBOR (Gross) Opportunistic Multi-Sector Securitised (Gross)
Five year correlation as of March 2019
Source:Schroders,Bloomberg,asofAugust31,2019.Correlationsbasedoncompositereturns,grossoffees,relativetounmanagedindexproxies.Correlationsreflectpastperformance,whichisnoguaranteeoffutureresults.Pleaserefertothebackforimportantinformation.
9A primer on securitisation
Therisk/returnprofilehasbeensuperioracrossboththelowervolatilitystrategiesandthereturn-seekingstrategies.
Figure 16: Low historical volatility/diversification
5 year annualized risk/return
Volatility
Enhanced LIBOR
Enhanced Plus LIBOR
Opportunistic
BB US Aggregate
BB US IG CorporateBB Global
Corporate
BAML US High Yield
JPM EMBI Global
JPM CLO BBB
BB Int. Govt/Credit
0%
1%
2%
3%
4%
5%
6%
7%
0% 1% 2% 3% 4% 5% 6% 7%
Source:Schroders,BloombergasofAugust31,2019.
Withoutgivingupreturn,investorshavetheabilitytocapturesecurity,structureandamortization.
Figure 17: Attractive return seeking potential
5 year cumulative return
90
100
110
120
130
140
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18
Opportunistic S&P Lev. Loan BAML HYBB Corp JPM EMBI JPM CLO BBB
Source:Schroders,BloombergasofAugust31,2019.Pastperformanceisnoguaranteeoffutureresults.Yieldscanfluctuateovertime.
Overallthereissignificantalphaadded,substantialbenefittoriskpremiumdiversificationandanadditionalbenefittoaspecialistmanagerthatcanmineforthevaluesacrossthecomplexanddiversemarketplace.
Figure 18: Securitised credit: attractive returns & diversification relative to traditional and alternative fixed income strategies
5-yearrisk/returnasofAugust2019
Standard Deviation (Annualized) Standard Deviation (Annualized)
Return ReturnBenchmarked: Index duration with added return Low duration/Opportunistic: Income/growth with low volatility
Bloomberg Barclays
Securitised
Bloomberg Barclays US Aggregate
Bloomberg Barclays Corporate
Enhanced Securitised
IG Securitised
0%
1%
2%
3%
4%
5%
6%
0% 1% 2% 3% 4% 5%
Opportunistic
S&P 500
JPM Emerging Market Bond
ICE BofAML US High Yield
S&P Performing Loans
Enhanced Securitised LIBOR
Enhanced Securitised Plus LIBOR
0%
2%
4%
6%
8%
10%
12%
0% 2% 4% 6% 8% 10% 12% 14%
Withinthisdiverseanddynamicmarket,Schroder’steamhasagenuineappreciationforriskandopportunity,andalonghistory ofservingclientsinthisregard.
Source:Bloomberg,SchrodersasofAugust31,2019.Performanceshownreflectspastperformance,whichisnoguaranteeoffutureresults.Thevalueofaninvestmentcan godownaswellasupandisnotguaranteed.Pleaserefertothebackforimportantinformation.
Correlation Comparison (5 years)
Bloomberg Barclays
Securitised
Bloomberg Barclays US Aggregate
Bloomberg Barclays
Corporates
InvestmentGradeSecuritised 0.95 0.95 0.78
Enhanced Securitised 0.84 0.80 0.66
Correlation Comparison (5 years) S&P 500 JPM Emerging
Market BondICE BoAML
US High Yield
S&P Performing
Loans
OpportunisticSecuritised 0.26 0.21 0.41 0.45
EnhancedSecuritised 0.32 0.24 0.49 0.52
EnhanceLIBOR 0.32 0.25 0.50 0.55
Wide range of underlying assets creates opportunity to benefit from asynchronous asset cycles
A primer on securitisation10
Figure 19: Securitised credit strategy performance as of June 30, 2019
1 Year 3 years (p.a) 5 years (p.a.) 7 years (p.a.) 10 years (p.a.)
Total return
Excess return
Total return
Excess return
Total return
Excess return
Total return
Excess return
Total return
Excess return
InvestmentGradeSecuritised(vsBarclaysSecuritised) 7.16% 0.79% 3.12% 1.01% 3.83% 1.24% 4.40% 2.02% 6.85% 3.34%
EnhancedSecuritised(vsBarclaysSecuritised) 7.38% 1.01% 4.47% 2.37% 5.56% 2.96% 7.44% 5.06% 9.49% 5.97%
EnhancedSecuritisedLIBOR(vs3-MonthLIBOR) 3.68% 1.12% 4.05% 2.30% 3.01% 1.82% 4.25% 3.32% 6.07% 5.30%
EnhancedSecuritisedPlusLIBOR(vs3-MonthLIBOR) 4.09% 1.53% 6.14% 4.40% 4.44% 3.25% 5.91% 4.97% - -
OpportunisticMulti-SectorSecuritised(vs1-MonthLIBOR) 4.44% 2.09% 8.13% 6.61% 6.33% 5.32% 9.76% 8.99% 11.13% 10.52%
OpportunisticLong/ShortSecuritised 5.14% - 10.11% - 7.24% - 10.56% - - -
SchroderEuropeanABS* (vs3-MonthGBPLIBOR) 0.63% -0.20% 2.54% 1.98% 1.42% 0.86% 2.65% 2.09% - -
Source:Schroders.Returnsreflectpastperformancegrossofanyfees,whichwouldhavebeenloweronanetbasis.Pastperformanceisnoguaranteeoffutureresults.Pleaserefertothebackofthispresentationformoredetails.*SchroderEuropeanABSreturnsareshowninGBP.
A word about securitised investment riskAllinvestmentsinvolverisksincludingtheriskofpossiblelossofprincipal.Themarketvalueofabondportfoliomaydeclineasaresultofanumberoffactors,includinginterestraterisk,creditrisk,inflation/deflationrisk,mortgageandasset-backedsecuritiesrisk,USGovernmentsecuritiesrisk,foreigninvestmentrisk,high-yieldsecuritiesriskandderivativesrisk.Asset-backed,mortgage-backedormortgage-relatedsecuritiesaresubjecttospecificprepaymentandextensionrisks,delinquencyandforeclosure.BondsratedBBB/Baaorhigherareconsideredinvestmentgrade,whilebondsratedBB/Baorlowerareconsideredspeculativeastothetimelypaymentofprincipalandinterest.Theuseofderivativesinvolvesrisksdifferentfrom,orpossiblygreaterthan,therisksassociatedwithinvestingdirectlyintheunderlyingassets.Theuseofleveragemaymagnifygainsorloses.Noinvestmentstrategyorriskmanagementtechniquecanguaranteereturnsoreliminateriskinanymarketenvironment.Assetallocationanddiversificationcannotensureaprofitorprotectagainstlossofprincipal.Durationisameasureofvolatilityexpressedinyears.Thehigherthenumber,thegreaterpotentialforvolatilityasinterestrateschange.
11A primer on securitisation
Appendix
Benchmarking is the hardest part
Benchmark data is attainable with the exception of non-agency MBS Ȃ MortgageIndicesarefocusedonAgencyMBSanddonotcovernonagencyMBS
Ȃ BloombergBarclaysMBSIndex Ȃ BAMLMortgageMasterII
Ȃ ABSindices Ȃ theBAMLfamilyhavereasonablecoverage
Ȃ BAMLABSfixed Ȃ BAMLABSfloating
Ȃ TheBloombergBarclaysSecuritisedIndexhasalmostnoABSduetoinclusioncriterialikesize,and144aeligibility
Ȃ CMBSindices Ȃ theBAMLfamilyhavereasonablecoverage
Ȃ BAMLCMBSfixed Ȃ BAMLCMBSfloating
Ȃ TheBloombergBarclaysSecuritisedIndexhasalmostnoCMBSduetoinclusioncriterialikesize,and144aeligibility
Ȃ JPCLOIEIndexcoversCLOs
Ȃ Non-agencyMBSisalargesectorwithoutanindex,creatinganinefficiency
Mark to market is the easy part
What data is available for pricing?MostABS,MBSandCMBSbecameTRACEeligiblein2016
Trace reporting is now a required element of trading for securitised products
Ȃ ABS,CMBS,certainnon-agencyMBS Ȃ Volumeandpricereportingrequiredwithin15minutesofatrade Ȃ Morepricetransparencyforindependentservices
Ȃ FT-IDCD,Reuters,S&PMarkitallprovidedailypricing
A primer on securitisation12
Disclosures
Schroder Enhanced Securitised CompositeAsof:December31,2018
Composite:SchroderEnhancedSecuritisedComposite Benchmark:BarclaysU.S.SecuritisedIndexTLCurrency:USDReturns as of: Dec-31-2018Inception Date:Dec-31-2005
Past performance is not indicative of future results.1Annualizedstandarddeviationofgrossmonthlyreturnsforthecompositeandmonthlyreturnsforthebenchmark2Assetweightedstandarddeviationofannualgrossreturnsofaccountsthathavebeeninthecompositefortheentireyear.Partperiodsarenotannualized.3SinceInceptionDecember31,20054SinceDec31,2003TotalFirmAssetsincludenon-feepayingaccounts.2003TotalFirmAssetsvaluehasbeenrestatedduetotheinclusionofthosenon-feepayingaccounts.TotalFirmAssetsfrom2007incorporatetheUK&USfirmmergerasdetailedintheDefinitionoftheFirm,fromthestartof2011SchroderPropertyInvestmentManagementMultiManageraccountsareincludedintheTotalFirmAssets
5Benchmarkvolatilitynotshownasthebenchmarkiscashwhichisnotcomparabletothecomposite*ReturnsareforapartperiodyearN/A-Informationisnotstatisticallymeaningfulduetoaninsufficientnumberofportfoliosfortheentireyear N/Aforperiodswithlessthan36monthsofavailablereturns
YearGross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
3 Year Composite Risk (%)1
3 Year Primary Benchmark Risk
(%)1
Number of Portfolios
(throughout period)
Account Dispersion (%)2
Market Value at end of Period
Average Account Value at end of Period
Percentage of Firm Assets (%) Total Firm Assets4
2018 1.71 1.20 0.99 2.16 2.28 < 5 N/A 1,664,518,813.00 33.406,938,455 12.162,773,308,48334.0 2017 4.65 4.13 2.51 1.74 1.81 < 5 N/A 1,378,766,751.00 00.719,885,954 80.247,000,211,55403.0 2016 5.34 4.81 1.78 1.85 2.13 < 5 N/A 1,543,042,837.00 52.907,067,583 75.836,084,721,20315.0 2015 6.93 6.40 1.47 2.45 2.30 < 5 N/A 415,702,415.77 98.702,158,702 00.000,000,597,6184.2 2014 11.06 10.51 5.88 2.45 2.20 < 5 N/A 482,600,145.34 76.270,003,142 00.000,000,600,8186.2 2013 9.92 9.37 -1.31 2.71 2.03 < 5 N/A 568,870,422.13 70.112,534,482 00.000,000,614,0297.2 2012 15.25 14.75 3.01 2.66 1.66 < 5 N/A 984,612,262.20 04.780,402,823 00.000,000,326,6129.5 2011 10.13 9.74 6.22 3.81 2.15 < 5 N/A 991,842,950.10 07.613,416,033 00.000,000,089,0237.4 2010 18.25 17.84 6.52 9.24 3.19 < 5 N/A 1,263,845,184.90 03.827,182,124 00.000,000,211,2227.5 2009 9.88 9.50 7.78 8.39 3.21 5 (5) 1.50 1,496,220,591.70 43.811,442,992 00.000,000,450,4222.6 2008 -29.47 -29.72 4.64 7.78 3.13 6 (6) 9.48 1,550,155,084.82 08.081,953,852 00.000,000,636,6123.9 2007 -1.27 -1.61 6.64 N/A N/A 8 (6) 0.77 3,114,274,271.00 88.382,482,983 00.000,000,822,2210.41 2006 5.66 5.29 5.16 N/A N/A 6 (5) 0.30 2,613,607,123.00 71.781,106,534 00.000,000,707,0226.21
As of Dec-2018Gross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
Composite Risk (%)1
Primary Benchmark Risk
(%)1
Annualized 3 Year 3.89 3.37 1.76 2.16 2.28Annualized 5 Year 5.89 5.37 2.51 2.07 2.16Annualized 7 Year 7.76 7.23 2.03 2.43 2.14
Annualized 10 Yea 9.21 8.72 3.45 2.96 2.22Annualized S.I.3 4.52 4.07 3.91 5.06 2.46
Definition of the Firm: TheFirmisdefinedasallaccountsmanagedbySchroderInvestmentManagementintheUS,UK,Switzerland,Singapore,HongKong,JapanandAustraliabywhollyownedsubsidiariesofSchrodersPLC.AccountsmanagedbySchrodersAdveqareexcluded,SchrodersAdveqclaimscomplianceseparately.AssetsmanagedagainstaliabilitydrivenmandateorinvestedindirectpropertyareexcludedfromtheGIPSFirm.AdvisoryportfoliossignedtoSchrodersInvestmentManagementHongKong(SIMHK)arealsoexcludedfromtheGIPSFirm.OnJanuary1,2017theSchrodersInvestmentManagementGIPSFirm(‘theFirm”)wasformedfollowingthemergerofindependentregionalSchrodersInvestmentManagement(SIM)GIPSFirmsdefinedbasedpredominantlyonlocationoftheinvestmentdeskandheldouttoclientsorprospectiveclientsasthefollowingdistinctfirms:combinedLondon/NewYork/Zurich(SIMUK/US&SIMSAGrespectively),Singapore(SIMSL),HongKong(SIMHK),Australia(SIMAL)andJapan(SIMJP).TheseFirmsweremergedasaresultoftheincreasinglyglobalnatureofthebusiness,detailsofpreviousfirmmergersareavailableuponrequest.OnSeptember19,2016,SchroderU.S.HoldingsInc., asubsidiaryofSchrodersplc,purchasedasecuritisedproductsteamfromanothermanager,assetsmanagedbythesecuritisedproductsteamare includedintheFirmfromDecember31,2016.Composite Definition: TheDiversifiedGrowthComposite(the“Composite”)iscomprisedofallfullydiscretionaryaccountsintheFirm,whichtargetareturnofInflationplus5.0%p.a.overaninvestmentcycle,primarilythroughinvestmentinadiversifiedrangeofassetclassesincludingequities,credit,governmentbondsandalternatives.Derivativesmaybeusedtoachievetheinvestmentobjectiveandtoreduceriskormanagethefundmoreefficiently.Fundsmayusegrossleverageandtakeshortpositions,howeverfundsdonotemploynetleverage.CompositereportspublishedfromJanuary1,2017havereplacedtheUKRetailPriceIndex(RPI)withtheUKConsumerPriceIndex(CPI)asourreportedmeasureofinflation,sinceevidenceshowsCPIisabettermeasureofeconomy-wideinflationandthisbringsthefundinlinewiththeindustryconvention.Composite Construction: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying,taxexempt,above$30millionandmanagedasdescribedabove.Newaccountsareincludedinthecompositeonefullmonthafterinceptiondatetoensuretheaccounthasbeenfullyinvested.Terminatedaccountsareexcludedfromthecompositeattheendofthepreviousmonth.Thecomposite’screationdateisOctober31,2016.Thecomposite’sstartdateisDecember31,2005.
Performance Calculation: Compositereturnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions).Eachaccount’sinvestmentperformancerateofreturniscalculatedmonthlyinaccordancewiththe‘time-weighted’rateofreturnmethod(ModifiedDietz).Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsisavailableuponrequest.TheCurrencyoftheCompositeisUSD.WithholdingTaxtreatmentmayvaryfromportfoliotoportfoliowithinthiscomposite.Fee Schedule: Returnsarenetoftradingexpensesbutgrossofcustodyfeesandothercosts.Netoffeesreturnshavebeencalculatedbaseduponthefollowingschedules:InceptiontoMay31,2012:grossreturnshavebeenreducedbyamodelfeerateof35bpsFromMay31,2012:grossreturnshavebeenreduced byamodelfeerateof50bps.Dispersion:Thedispersionofannualreturnsismeasuredbytheassetweightedstandarddeviationofportfolioreturnsrepresentedwithinthecompositeforthefullyearprovidedaminimumof5portfoliosareavailable.GIPS Compliance and Verification: SchroderInvestmentManagement(‘theFirm’)claimscompliancewiththeGlobalInvestmentPerformanceStandards(GIPS®)andhaspreparedandpresentedthisreportincompliancewiththe GIPSstandards.TheFirmhasbeenindependentlyverifiedfortheperiodsJanuary1,1996toDecember31,2018.Theverificationreport(s)is/areavailableuponrequest.Verificationassesseswhether(1)theFirmhascompliedwithallthecompositeconstructionrequirementsoftheGIPSstandardsonafirm-widebasisand(2)theFirm’spoliciesandproceduresaredesignedtocalculateandpresentperformanceincompliancewiththeGIPSstandards.Verificationdoesnotensuretheaccuracyofanyspecificcompositepresentation.Acompletelistofallcompositesandtheirdescriptionsisavailableuponrequest.Additionalinformationregardingpoliciesforcalculatingandreportingreturnsisavailableuponrequest.Additional Information: TheexchangeratesusedareprovidedbyWM.Eachcurrencyisvaluedat4pmonthelastbusinessdayofthemonth.Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsandadescriptionofallcompositesareavailableonrequest.Risk Statistics:UnavailabilityStandardDeviationsforcompositeanditsbenchmarkthathavenotbeenactiveorinexistencefor3yearsormoreare notprovidedinthepresentation.
13A primer on securitisation
Schroder Enhanced Securitised Plus USD LIBOR CompositeAsof:December31,2018
Composite:SchroderEnhancedSecuritisedPlusUSDLIBORComposite Benchmark:3MonthUSLiborCurrency:USDReturns as of: Dec-31-2018Inception Date:Aug-31-2009
Past performance is not indicative of future results.1Annualizedstandarddeviationofgrossmonthlyreturnsforthecompositeandmonthlyreturnsforthebenchmark2Assetweightedstandarddeviationofannualgrossreturnsofaccountsthathavebeeninthecompositefortheentireyear.Partperiodsarenotannualized.3SinceInceptionAugust31,20094SinceDec31,2003TotalFirmAssetsincludenon-feepayingaccounts.2003TotalFirmAssetsvaluehasbeenrestatedduetotheinclusionofthosenon-feepayingaccounts.TotalFirmAssetsfrom2007incorporatetheUK&USfirmmergerasdetailedintheDefinitionoftheFirm,fromthestartof2011SchroderPropertyInvestmentManagementMultiManageraccountsareincludedintheTotalFirmAssets
5Benchmarkvolatilitynotshownasthebenchmarkiscashwhichisnotcomparabletothecomposite*ReturnsareforapartperiodyearN/A-Informationisnotstatisticallymeaningfulduetoaninsufficientnumberofportfoliosfortheentireyear N/Aforperiodswithlessthan36monthsofavailablereturns
YearGross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
3 Year Composite Risk (%)1
3 Year Primary Benchmark Risk
(%)1
Number of Portfolios
(throughout period)
Account Dispersion (%)2
Market Value at end of Period
Average Account Value at end of Period
Percentage of Firm Assets (%) Total Firm Assets4
2018 3.43 2.91 2.37 1.44 0.20 < 5 N/A 180,038,143.00 180,038,143.00 0.05 384,803,377,261.212017 8.50 7.96 1.29 1.52 0.12 < 5 N/A 203,499,944.00 203,499,944.00 0.04 455,112,000,742.082016 4.48 3.96 0.75 1.75 0.07 < 5 N/A 206,983,918.10 206,983,918.10 0.07 302,127,480,638.572015 1.44 0.93 0.31 2.80 0.01 < 5 N/A 197,644,208.10 197,644,208.10 1.18 16,795,000,000.002014 5.95 5.42 0.24 3.60 0.03 < 5 N/A 177,097,898.50 177,097,898.50 0.98 18,006,000,000.002013 4.70 4.18 0.27 4.30 0.03 < 5 N/A 158,188,972.60 158,188,972.60 0.77 20,416,000,000.002012 16.92 16.33 0.44 4.69 0.03 < 5 N/A 115,986,114.60 115,986,114.60 0.70 16,623,000,000.002011 -5.10 -5.57 0.34 N/A N/A < 5 N/A 58,289,010.74 58,289,010.74 0.28 20,980,000,000.002010 14.17 13.60 0 35 N/A N/A < 5 N/A 135,929,006.70 135,929,006.70 0.61 22,112,000,000.00
Sep 09 to end Dec 09 4.14 3.96 0.09 N/A N/A < 5 N/A 257,113,861.40 257,113,861.40
As of Dec-2018Gross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
Composite Risk (%)1
Primary Benchmark Risk
(%)1
Annualized 3 Year 5.45 4.92 1.47 1.44 0.20Annualized 5 Year 4.73 4.21 0.99 1.51 0.23Annualized 7 Year 6.39 5.86 0.81 2.63 0.21
Annualized 10 Year N/A N/A N/A N/A N/AAnnualized S.I.3 6.12 5.59 0.69 3.27 0.19
Definition of the Firm: TheFirmisdefinedasallaccountsmanagedbySchroderInvestmentManagementintheUS,UK,Switzerland,Singapore,HongKong,JapanandAustraliabywhollyownedsubsidiariesofSchrodersPLC.AccountsmanagedbySchrodersAdveqareexcluded,SchrodersAdveqclaimscomplianceseparately.AssetsmanagedagainstaliabilitydrivenmandateorinvestedindirectpropertyareexcludedfromtheGIPSFirm.AdvisoryportfoliossignedtoSchrodersInvestmentManagementHongKong(SIMHK)arealsoexcludedfromtheGIPSFirm.OnJanuary1,2017theSchrodersInvestmentManagementGIPSFirm(‘theFirm”)wasformedfollowingthemergerofindependentregionalSchrodersInvestmentManagement(SIM)GIPSFirmsdefinedbasedpredominantlyonlocationoftheinvestmentdeskandheldouttoclientsorprospectiveclientsasthefollowingdistinctfirms:combinedLondon/NewYork/Zurich(SIMUK/US&SIMSAGrespectively),Singapore(SIMSL),HongKong(SIMHK),Australia(SIMAL)andJapan(SIMJP).TheseFirmsweremergedasaresultoftheincreasinglyglobalnatureofthebusiness,detailsofpreviousfirmmergersareavailableuponrequest.OnSeptember19,2016,SchroderU.S.HoldingsInc., asubsidiaryofSchrodersplc,purchasedasecuritisedproductsteamfromanothermanager,assetsmanagedbythesecuritisedproductsteamare includedintheFirmfromDecember31,2016.Composite Definition: AccountsincludedintheSchroderEnhancedSecuritisedUSDLIBORCompositeseektoachievereturnsabove3monthUSDLIBORoranequivalentbenchmarkbyprovidingcapitalgrowthandincomeprimarilythroughinvestmentinsecuritisedassetssuchasasset-backedsecuritiesandmortgage-backedsecurities.Theaccountsmaysubstantiallyinvestinbelowinvestmentgradesecurities.Composite Construction: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying,taxexempt,above$30millionandmanagedasdescribedabove.Newaccountsareincludedinthecompositeonefullmonthafterinceptiondatetoensuretheaccounthasbeenfullyinvested.Terminatedaccountsareexcludedfromthecompositeattheendofthepreviousmonth.Thecomposite’screationdateisOctober31,2016.Thecomposite’sstartdateisAugust31,2009.Performance Calculation: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying,taxexempt,above$30millionandmanagedasdescribedabove.Newaccountsareincludedinthecompositeonefullmonthafterinceptiondatetoensuretheaccounthasbeenfullyinvested.Terminatedaccountsareexcludedfromthecompositeattheendofthepreviousmonth.Thecomposite’screationdateisOctober31,2016.Thecomposite’sstartdateisAugust31,2009.Composite
returnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions).Eachaccount’sinvestmentperformancerateofreturniscalculatedmonthlyinaccordancewiththe‘time-weighted’rateofreturnmethod(ModifiedDietz).Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsisavailableuponrequest.TheCurrencyoftheCompositeisUSD.WithholdingTaxtreatmentmayvaryfromportfoliotoportfoliowithinthiscomposite.Performanceresultscanbepresentedbothnetoffeesand/orgrossoffees.“Netoffees”performanceresultsarenetofmanagementfee.Clientswithaccountsinthecompositeincurotherexpensesinconnectionwiththeiraccountssuchascustodyfeesandothercosts.Netreturnshavebeencalculatedbaseduponthehighestfeeratechargedtoeachaccountinthecomposite.Fee Schedule: Returnsarenetoftradingexpensesbutgrossofcustodyfeesandothercosts.Netoffeesreturnshavebeencalculatedbaseduponthegrossreturnsandamodelfeerateof50bpsp.a.Dispersion: Internaldispersioniscalculatedusingassetweightedstandarddeviationofallportfolioswherethereareatleast5portfoliosthatareincluded inthecompositefortheentireyear.GIPS Compliance and Verification: SchroderInvestmentManagement(‘theFirm’)claimscompliancewiththeGlobalInvestmentPerformanceStandards(GIPS®)andhaspreparedandpresentedthisreportincompliancewiththeGIPSstandards.TheFirmhasbeenindependentlyverifiedfortheperiodsJanuary1,1996toDecember31,2018.Theverificationreport(s)is/areavailableuponrequest.Verificationassesseswhether(1)theFirmhascompliedwithallthecompositeconstructionrequirementsoftheGIPSstandardsonafirm-widebasisand(2)theFirm’spoliciesandproceduresaredesignedtocalculateandpresentperformanceincompliancewiththeGIPSstandards.Verificationdoesnotensuretheaccuracyofanyspecificcompositepresentation.Acompletelistofallcompositesandtheirdescriptionsisavailableuponrequest.Additionalinformationregardingpoliciesforcalculatingandreportingreturnsisavailableuponrequest.Additional Information:TheexchangeratesusedareprovidedbyWM.Eachcurrencyisvaluedat4pmonthelastbusinessdayofthemonth.Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsandadescriptionofallcompositesareavailableonrequest.Risk Statistics: UnavailabilityStandardDeviationsforcompositeanditsbenchmarkthathavenotbeenactiveorinexistencefor3yearsormore arenotprovidedinthepresentation.
A primer on securitisation14
Schroder – European ABS CompositeAsof:December31,2018
Pastperformanceisnotindicativeoffutureresults.Futureperformancemaybemoreorlessthantheperformanceshown.Time-weightedtotalratesofreturnadjustforcontributionsandwithdrawals.Theyincludebothincomeandchangeinmarketvalue.
ThebenchmarkfortheSchroder–EuropeanABSPortfoliois3-monthGBPLIBOR.
TheEuropeanABSportfolioholdsGBP,USD,andEUR-denominatedABSandismanagedbyChrisAmes(FundManager,FixedIncome).IthasbeensetupasaseparateGBP-denominatedcustodyaccount.Somepointstonote:
Ȃ Apartfromcurrencyforwards(tohedgetheEURandUSDexposuresbacktoGBP)thereistobenoexchangetradedorOTCderivatives
Ȃ TheportfolioissetupforspotFXwithGBPasbasecurrency Ȃ AsthisisaUKAUT,coupons,maturities,principalpaymentsandallotherincomewillbesettoautomaticallysweeptoGBP
Ȃ Benchmarkis3-moGBPLIBOR(UKC0TR03) Ȃ ReturnTarget:+150-250bpinexcessofLIBOR Ȃ Notrackingerrorasthisisacashbenchmark
TheABSportfoliooperatesasaleadportfoliowithGBPreportingwithalltradingfromGBPwithtradessetupwithCRTSFXfromSterling.Coupons,maturities,principlepaymentsandallotherincomearesettoautomaticallysweeptoGBP.
15A primer on securitisation
Schroder Investment Grade Securitised CompositeAsof:December31,2018
Composite:SchroderInvestmentGradeSecuritisedComposite Benchmark:BarclaysU.S.SecuritisedIndexCurrency:USDReturns as of: Dec-31-2018Inception Date:Dec-31-2005
Past performance is not indicative of future results.1Annualizedstandarddeviationofgrossmonthlyreturnsforthecompositeandmonthlyreturnsforthebenchmark2Assetweightedstandarddeviationofannualgrossreturnsofaccountsthathavebeeninthecompositefortheentireyear.Partperiodsarenotannualized.3SinceInceptionDecember31,20054SinceDec31,2003TotalFirmAssetsincludenon-feepayingaccounts.2003TotalFirmAssetsvaluehasbeenrestatedduetotheinclusionofthosenon-feepayingaccounts.TotalFirmAssetsfrom2007incorporatetheUK&USfirmmergerasdetailedintheDefinitionoftheFirm,fromthestartof2011SchroderPropertyInvestmentManagementMultiManageraccountsareincludedintheTotalFirmAssets
5Benchmarkvolatilitynotshownasthebenchmarkiscashwhichisnotcomparabletothecomposite*ReturnsareforapartperiodyearN/A-Informationisnotstatisticallymeaningfulduetoaninsufficientnumberofportfoliosfortheentireyear N/Aforperiodswithlessthan36monthsofavailablereturns
YearGross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
3 Year Composite Risk
(%)1
3 Year Primary Benchmark Risk
(%)1
Number of Portfolios
(throughout period)
Account Dispersion (%)2
Market Value at end of Period
Average Account Value at end of Period
Percentage of Firm Assets (%)
Total Firm Assets4
2018 1.35 1.05 0.99 2.29 2.28 < 5 N/A 1,116,112,245.00 279,028,061.25 0.29 384,803,377,261.21 2017 3.24 2.93 2.51 2.14 1.81 < 5 N/A 837,457,890.00 209,364,472.50 0.18 455,112,000,742.08 2016 3.69 3.38 1.78 2.32 2.13 < 5 N/A 273,900,525.00 136,950,262.50 0.09 302,127,480,638.57 2015 2.66 2.35 1.47 2.71 2.30 < 5 N/A 264,621,861.54 132,310,930.77 1.58 16,795,000,000.00 2014 7.04 6.72 5.88 2.61 2.20 < 5 N/A 264,384,063.50 132,192,031.75 1.47 18,006,000,000.00 2013 2.19 1.88 -1.31 2.61 2.03 < 5 N/A 179,190,798.10 179,190,798.10 0.88 20,416,000,000.00 2012 11.97 11.64 3.01 1.90 1.66 < 5 N/A 175,620,327.96 175,620,327.96 1.06 16,623,000,000.00 2011 8.70 8.38 6.22 2.88 2.15 < 5 N/A 157,089,706.61 157,089,706.61 0.75 20,980,000,000.00 2010 13.72 13.38 6.52 8.97 3.19 < 5 N/A 144,738,362.32 144,738,362.32 0.65 22,112,000,000.00 2009 14.85 14.51 7.78 8.53 3.21 < 5 N/A 127,490,239.98 127,490,239.98 0.53 24,054,000,000.00 2008 -29.54 -29.75 4.64 7.77 3.13 < 5 N/A 111,100,392.68 111,100,392.68 0.67 16,636,000,000.00 2007 -1.92 -2.22 6.64 N/A N/A < 5 N/A 157,899,572.31 157,899,572.31 0.71 22,228,000,000.00 2006 6.10 5.78 5.16 N/A N/A < 5 N/A 105,017,859.21 105,017,859.21 0.51 20,707,000,000.00
As of Dec-2018Gross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
Composite Risk (%)1
Primary Benchmark Risk
(%)1
Annualized 3 Year 2.76 2.45 1.76 2.29 2.28Annualized 5 Year 3.58 3.27 2.51 2.29 2.16Annualized 7 Year 4.54 4.22 2.03 2.49 2.14Annualized 10 Year 6.83 6.51 3.45 2.78 2.22
Annualized S.I.3 2.74 2.43 3.91 4.87 2.46
Definition of the Firm: TheFirmisdefinedasallaccountsmanagedbySchroderInvestmentManagementintheUS,UK,Switzerland,Singapore,HongKong,JapanandAustraliabywhollyownedsubsidiariesofSchrodersPLC.AccountsmanagedbySchrodersAdveqareexcluded,SchrodersAdveqclaimscomplianceseparately.AssetsmanagedagainstaliabilitydrivenmandateorinvestedindirectpropertyareexcludedfromtheGIPSFirm.AdvisoryportfoliossignedtoSchrodersInvestmentManagementHongKong(SIMHK)arealsoexcludedfromtheGIPSFirm.OnJanuary1,2017theSchrodersInvestmentManagementGIPSFirm(‘theFirm”)wasformedfollowingthemergerofindependentregionalSchrodersInvestmentManagement(SIM)GIPSFirmsdefinedbasedpredominantlyonlocationoftheinvestmentdeskandheldouttoclientsorprospectiveclientsasthefollowingdistinctfirms:combinedLondon/NewYork/Zurich(SIMUK/US&SIMSAGrespectively),Singapore(SIMSL),HongKong(SIMHK),Australia(SIMAL)andJapan(SIMJP).TheseFirmsweremergedasaresultoftheincreasinglyglobalnatureofthebusiness,detailsofpreviousfirmmergersareavailableuponrequest.OnSeptember19,2016,SchroderU.S.HoldingsInc.,asubsidiaryofSchrodersplc,purchasedasecuritisedproductsteamfromanothermanager,assetsmanagedbythesecuritisedproductsteamareincludedintheFirmfromDecember31,2016.Composite Definition: AccountsincludedintheSchroderInvestmentGradeSecuritisedCompositeseektoachievereturnsabovetheBloombergBarclaysUSSecuritisedIndexoranequivalentbenchmarkbyprovidingcapitalgrowthandincomeprimarilythroughinvestmentininvestmentgradesecuritisedassetssuchasasset-backedsecuritiesandmortgage-backedsecurities.AminimumaccountsizerestrictionofUSD30mappliestoaccountsinthiscomposite.Performance Calculation: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying,taxexempt,above$30millionandmanagedasdescribedabove.Newaccountsareincludedinthecompositeonefullmonthafterinceptiondatetoensuretheaccounthasbeenfullyinvested.Terminatedaccountsareexcludedfromthecompositeattheendofthepreviousmonth.Thecomposite’screationdateisOctober31,2016Thecomposite’sstartdateisDecember31,2005Compositereturnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions).Eachaccount’sinvestmentperformancerateofreturniscalculatedmonthlyinaccordancewith
the‘time-weighted’rateofreturnmethod(ModifiedDietz).Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsisavailableuponrequest.TheCurrencyoftheCompositeisUSD.WithholdingTaxtreatmentmayvaryfromportfoliotoportfoliowithinthiscomposite.Performanceresultscanbepresentedbothnetoffeesand/orgrossoffees.“Netoffees”performanceresultsarenetofmanagementfee.Clientswithaccountsinthecompositeincurotherexpensesinconnectionwiththeiraccountssuchascustodyfeesandothercosts.Netreturnshavebeencalculatedbaseduponthehighestfeeratechargedtoeachaccountinthecomposite.Fee Schedule: Returnsarenetoftradingexpensesbutgrossofcustodyfeesandothercosts.Netoffeesreturnshavebeencalculatedbaseduponthegrossreturnsandamodelfeerateof30bpsp.a.Dispersion: Internaldispersioniscalculatedusingassetweightedstandarddeviationofallportfolioswherethereareatleast5portfoliosthatareincluded inthecompositefortheentireyear.Leverage: NoneoftheaccountsintheCompositeuseleverage.GIPS Compliance and Verification: SchroderInvestmentManagement(‘theFirm’)claimscompliancewiththeGlobalInvestmentPerformanceStandards(GIPS®)andhaspreparedandpresentedthisreportincompliancewiththeGIPSstandards.TheFirmhasbeenindependentlyverifiedfortheperiodsJanuary1,1996toDecember31,2018.Theverificationreport(s)is/areavailableuponrequest.Verificationassesseswhether(1)theFirmhascompliedwithallthecompositeconstructionrequirementsoftheGIPSstandardsonafirm-widebasisand(2)theFirm’spoliciesandproceduresaredesignedtocalculateandpresentperformanceincompliancewiththeGIPSstandards.Verificationdoesnotensuretheaccuracyofanyspecificcompositepresentation.Acompletelistofallcompositesandtheirdescriptionsisavailableuponrequest.Additionalinformationregardingpoliciesforcalculatingandreportingreturnsisavailableuponrequest.Additional Information:TheexchangeratesusedareprovidedbyWM.Eachcurrencyisvaluedat4pmonthelastbusinessdayofthemonth.Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsandadescriptionofallcompositesareavailableonrequest.Risk Statistics:UnavailabilityStandardDeviationsforcompositeanditsbenchmarkthathavenotbeenactiveorinexistencefor3yearsormoreare notprovidedinthepresentation.
A primer on securitisation16
Schroder Opportunistic Long Short Securitised CompositeAsof:December31,2018
Composite:SchroderOpportunisticLongShortSecuritisedComposite Benchmark:n/aCurrency:USDReturns as of: Dec-31-2018Inception Date:Apr-30-2012
Past performance is not indicative of future results.1Annualizedstandarddeviationofgrossmonthlyreturnsforthecompositeandmonthlyreturnsforthebenchmark2Assetweightedstandarddeviationofannualgrossreturnsofaccountsthathavebeeninthecompositefortheentireyear.Partperiodsarenotannualized.3SinceInceptionApril30,20124SinceDec31,2003TotalFirmAssetsincludenon-feepayingaccounts.2003TotalFirmAssetsvaluehasbeenrestatedduetotheinclusionofthosenon-feepayingaccounts.TotalFirmAssetsfrom2007incorporatetheUK&USfirmmergerasdetailedintheDefinitionoftheFirm,fromthestartof2011SchroderPropertyInvestmentManagementMultiManageraccountsareincludedintheTotalFirmAssets
5Benchmarkvolatilitynotshownasthebenchmarkiscashwhichisnotcomparabletothecomposite*ReturnsareforapartperiodyearN/A-Informationisnotstatisticallymeaningfulduetoaninsufficientnumberofportfoliosfortheentireyear N/Aforperiodswithlessthan36monthsofavailablereturns
YearGross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
3 Year Composite Risk
(%)1
3 Year Primary Benchmark Risk
(%)1
Number of Portfolios
(throughout period)
Account Dispersion (%)2
Market Value at end of Period
Average Account Value at end of Period
Percentage of Firm Assets (%)
Total Firm Assets4
2018 5.12 2.74 N/A 2.88 N/A < 5 N/A 36,289,711.49 36,289,711.49 0.01 384,803,377,261.21 2017 15.56 12.23 N/A 3.03 N/A < 5 N/A 32,142,177.98 32,142,177.98 0.01 455,112,000,742.08 2016 7.19 5.91 N/A 3.28 N/A < 5 N/A 28,093,582.42 28,093,582.42 0.01 302,127,480,638.57 2015 1.45 0.40 N/A 5.00 N/A < 5 N/A 31,103,726.88 31,103,726.88 0.19 16,795,000,000.00 2014 13.14 10.76 N/A N/A N/A < 5 N/A 36,800,129.47 36,800,129.47 0.20 18,006,000,000.00 2013 12.40 10.51 N/A N/A N/A < 5 N/A 32,291,794.26 32,291,794.26 0.16 20,416,000,000.00
May 12 to end Dec 12 16.08 13.80 N/A N/A N/A < 5 N/A 29,374,499.51 29,374,499.51
As of Dec-2018Gross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
Composite Risk (%)1
Primary Benchmark Risk
(%)1
Annualized 3 Year 9.20 6.89 N/A 2.88 N/AAnnualized 5 Year 8.37 6.31 N/A 2.93 N/AAnnualized 7 Year N/A N/A N/A N/A N/AAnnualized 10 Year N/A N/A N/A N/A N/A
Annualized S.I.3 10.54 8.36 N/A 4.38 N/A
Definition of the Firm: TheFirmisdefinedasallaccountsmanagedbySchroderInvestmentManagementintheUS,UK,Switzerland,Singapore,HongKong,JapanandAustraliabywhollyownedsubsidiariesofSchrodersPLC.AccountsmanagedbySchrodersAdveqareexcluded,SchrodersAdveqclaimscomplianceseparately.AssetsmanagedagainstaliabilitydrivenmandateorinvestedindirectpropertyareexcludedfromtheGIPSFirm.AdvisoryportfoliossignedtoSchrodersInvestmentManagementHongKong(SIMHK)arealsoexcludedfromtheGIPSFirm.OnJanuary1,2017theSchrodersInvestmentManagementGIPSFirm(‘theFirm”)wasformedfollowingthemergerofindependentregionalSchrodersInvestmentManagement(SIM)GIPSFirmsdefinedbasedpredominantlyonlocationoftheinvestmentdeskandheldouttoclientsorprospectiveclientsasthefollowingdistinctfirms:combinedLondon/NewYork/Zurich(SIMUK/US&SIMSAGrespectively),Singapore(SIMSL),HongKong(SIMHK),Australia(SIMAL)andJapan(SIMJP).TheseFirmsweremergedasa resultoftheincreasinglyglobalnatureofthebusiness,detailsofpreviousfirmmergersareavailableuponrequest.Composite Definition: AccountsincludedintheSchroderLongShortSecuritisedCompositeseekstoachieveareturnof10%-12%overaninvestmentcyclebyprovidingcapitalgrowthandincomeprimarilythroughinvestmentinsecuritisedassetssuchasasset-backedsecurities,mortgage-backedsecuritiesandrelatedloans.Theaccountsmayinvestinbelowinvestmentgradesecuritiesandderivatives.InMay2017thenameofthecompositechangedfromOpportunisticLongShortCompositetoSchroderOpportunisticLongShortSecuritisedComposite.Thischangedoesnotaffectthecompositehistoryortheinvestmentstrategy.Performance Calculation: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying,taxexemptandmanagedasdescribedabove.Newaccountsareincludedinthecompositeonefullmonthafterinceptiondatetoensuretheaccounthasbeenfullyinvested.Terminatedaccountsareexcludedfromthecompositeattheendofthepreviousmonth.NOTE–NOMinimumonthiscomposite.Thecomposite’screationdateisOctober31,2016Thecomposite’sstartdateisApril30,2012.Compositereturnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions).Eachaccount’sinvestmentperformancerateofreturniscalculatedmonthlyinaccordancewiththe‘time-weighted’rateofreturnmethod(ModifiedDietz).Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsisavailableuponrequest.TheCurrencyoftheCompositeis
USD.WithholdingTaxtreatmentmayvaryfromportfoliotoportfoliowithinthiscomposite.Performanceresultscanbepresentedbothnetoffeesand/orgrossoffees.“Netoffees”performanceresultsarenetofmanagementfee.Clientswithaccountsinthecompositeincurotherexpensesinconnectionwiththeiraccountssuchascustodyfeesandothercosts.Netreturnshavebeencalculatedbaseduponthehighestfeeratechargedtoeachaccountinthecomposite.Thefeeschedulesmayhavearangeofcombinedmanagementandperformancefees,thehighestbasefeeis1.5%perannum.Fee Schedule: Returnsarenetoftradingexpensesbutgrossofcustodyfeesandothercosts.Accountsmaypayaperformancefee,netreturnsaretheassetweightedactualnetreturnsfortheunderlyingaccounts.Netoffeesreturns havebeencalculatedbaseduponthefollowingschedules:FromMay1,2012toApr30,2017:amodelhighestfeeof1%p.a.plusa10%performancefee.FromApr30,2017:amodelhighestfeeof1.5%p.a.plusa20%performancefee.Dispersion: Internaldispersioniscalculatedusingassetweightedstandarddeviationofallportfolioswherethereareatleast5portfoliosthatareincluded inthecompositefortheentireyear.Leverage: Leverageispermittedintheaccountinthiscompositeupto300%.GIPS Compliance and Verification: SchroderInvestmentManagement(‘theFirm’)claimscompliancewiththeGlobalInvestmentPerformanceStandards(GIPS®)andhaspreparedandpresentedthisreportincompliancewiththe GIPSstandards.TheFirmhasbeenindependentlyverifiedfortheperiodsJanuary1,1996toDecember31,2018.Theverificationreport(s)is/areavailableuponrequest.Verificationassesseswhether(1)theFirmhascompliedwithallthecompositeconstructionrequirementsoftheGIPSstandardsonafirm-widebasisand(2)theFirm’spoliciesandproceduresaredesignedtocalculateandpresentperformanceincompliancewiththeGIPSstandards.Verificationdoesnotensuretheaccuracyofanyspecificcompositepresentation.Acompletelistofallcompositesandtheirdescriptionsisavailableuponrequest.Additionalinformationregardingpoliciesforcalculatingandreportingreturnsisavailableuponrequest.Additional Information:TheexchangeratesusedareprovidedbyWM.Eachcurrencyisvaluedat4pmonthelastbusinessdayofthemonth.Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsandadescriptionofallcompositesareavailableonrequest.Risk Statistics:UnavailabilityStandardDeviationsforcompositeanditsbenchmarkthathavenotbeenactiveorinexistencefor3yearsormoreare notprovidedinthepresentation.
17A primer on securitisation
Schroder Opportunistic Multi-Sector Securitised CompositeAsof:December31,2017
Composite:SchroderOpportunisticMulti-SectorSecuritisedComposite Benchmark:1MonthUSLIBORCurrency:USDReturns as of: Dec-31-2018Inception Date:Mar-31-2008
Past performance is not indicative of future results.1Annualizedstandarddeviationofgrossmonthlyreturnsforthecompositeandmonthlyreturnsforthebenchmark2Assetweightedstandarddeviationofannualgrossreturnsofaccountsthathavebeeninthecompositefortheentireyear.Partperiodsarenotannualized.3SinceInceptionMarch31,20084SinceDec31,2003TotalFirmAssetsincludenon-feepayingaccounts.2003TotalFirmAssetsvaluehasbeenrestatedduetotheinclusionofthosenon-feepayingaccounts.TotalFirmAssetsfrom2007incorporatetheUK&USfirmmergerasdetailedintheDefinitionoftheFirm,fromthestartof2011SchroderPropertyInvestmentManagementMultiManageraccountsareincludedintheTotalFirmAssets
5Benchmarkvolatilitynotshownasthebenchmarkiscashwhichisnotcomparabletothecomposite*ReturnsareforapartperiodyearN/A-Informationisnotstatisticallymeaningfulduetoaninsufficientnumberofportfoliosfortheentireyear N/Aforperiodswithlessthan36monthsofavailablereturns
YearGross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
3 Year Composite Risk
(%)1
3 Year Primary Benchmark Risk
(%)1
Number of Portfolios
(throughout period)
Account Dispersion (%)2
Market Value at end of Period
Average Account Value at end of Period
Percentage of Firm Assets (%)
Total Firm Assets4
2018 4.41 3.63 2.07 2.07 0.20 < 5 N/A 1,400,372,360.00 700,186,180.00 0.36 384,803,377,261.21 2017 12.05 11.39 1.13 2.09 0.12 < 5 N/A 1,289,083,340.00 644,541,670.00 0.28 455,112,000,742.08 2016 7.49 7.15 0.49 2.50 0.05 < 5 N/A 1,151,760,432.00 575,880,216.00 0.38 302,127,480,638.57 2015 2.48 2.15 0.20 4.49 0.01 < 5 N/A 1,072,535,954.10 536,267,977.05 6.39 16,795,000,000.00 2014 9.94 8.87 0.16 5.58 0.01 < 5 N/A 924,656,268.53 462,328,134.27 5.14 18,006,000,000.00 2013 10.61 9.56 0.19 6.65 0.01 < 5 N/A 784,384,074.19 392,192,037.10 3.84 20,416,000,000.00 2012 29.14 28.18 0.24 6.43 0.01 < 5 N/A 690,721,459.39 345,360,729.70 4.16 16,623,000,000.00 2011 -5.51 -6.21 0.24 8.09 0.02 < 5 N/A 460,404,373.70 230,202,186.85 2.19 20,980,000,000.00 2010 21.44 20.54 0.28 N/A N/A < 5 N/A 871,479,233.80 290,493,077.93 3.94 22,112,000,000.00 2009 19.89 19.00 0.34 N/A N/A 5 (4) N/A 990,588,773.60 198,117,754.72 4.12 24,054,000,000.00
Q2 08 to end Q4 08 -20.89 -21.33 1.89 N/A N/A < 5 N/A 556,465,304.90 139,116,326.23
As of Dec-2018Gross Composite
Return (%)Net Composite
Return (%)
Primary Benchmark Return (%)
Composite Risk (%)1
Primary Benchmark Risk
(%)1
Annualized 3 Year 7.94 7.34 1.23 2.07 0.20Annualized 5 Year 7.22 6.58 0.81 2.19 0.21Annualized 7 Year 10.60 9.86 0.64 4.11 0.20Annualized 10 Year 10.78 10.02 0.53 5.57 0.17
Annualized S.I.3 7.62 6.88 0.67 8.28 0.23
Definition of the Firm: TheFirmisdefinedasallaccountsmanagedbySchroderInvestmentManagementintheUS,UK,Switzerland,Singapore,HongKong,JapanandAustraliabywhollyownedsubsidiariesofSchrodersPLC.AccountsmanagedbySchrodersAdveqareexcluded,SchrodersAdveqclaimscomplianceseparately.AssetsmanagedagainstaliabilitydrivenmandateorinvestedindirectpropertyareexcludedfromtheGIPSFirm.AdvisoryportfoliossignedtoSchrodersInvestmentManagementHongKong(SIMHK)arealsoexcludedfromtheGIPSFirm.OnJanuary1,2017theSchrodersInvestmentManagementGIPSFirm(‘theFirm”)wasformedfollowingthemergerofindependentregionalSchrodersInvestmentManagement(SIM)GIPSFirmsdefinedbasedpredominantlyonlocationoftheinvestmentdeskandheldouttoclientsorprospectiveclientsasthefollowingdistinctfirms:combinedLondon/NewYork/Zurich(SIMUK/US&SIMSAGrespectively),Singapore(SIMSL),HongKong(SIMHK),Australia(SIMAL)andJapan(SIMJP).TheseFirmsweremergedasa resultoftheincreasinglyglobalnatureofthebusiness,detailsofpreviousfirmmergersareavailableuponrequest.Composite Definition: AccountsincludedintheSchroderOpportunisticMulti-SectorSecuritisedCompositeseektoachievereturnsaboveUSDLIBORoranequivalentbenchmarkbyprovidingcapitalgrowthandincomeprimarilythroughinvestmentinsecuritisedassetssuchasasset-backedsecurities,mortgage-backedsecuritiesandrelatedloans.Theaccountsmaysubstantiallyinvestinbelowinvestmentgradesecurities.InMay2017thenameofthecompositechangedfromSIMNAOpportunisticMulti-SectorMBSCompositetoSIMNAOpportunisticMulti-SectorSecuritisedComposite.Thischangedoesnotaffect thecompositehistoryortheinvestmentstrategy.Composite Construction: ThecompositereturnsincludealloftheFirm’sseparateaccountsandcommingledfundswhicharediscretionary,feepaying, taxexempt,andmanagedasdescribedabove.Newaccountsareincludedin thecompositeonefullmonthafterinceptiondatetoensuretheaccounthas beenfullyinvested.Terminatedaccountsareexcludedfromthecompositeat theendofthepreviousmonth.TheCompositehasnominimumassetlevel. Thecomposite’screationdateisOctober31,2016.Thecomposite’sstartdate isMarch31,2008.Performance Calculation: Compositereturnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions).Eachaccount’sinvestmentperformancerateofreturniscalculatedmonthlyinaccordancewiththe‘time-weighted’rateofreturnmethod(ModifiedDietz).Additionalinformationregardingpoliciesforvaluing
portfolios,calculatingandreportingreturnsisavailableuponrequest.TheCurrencyoftheCompositeisUSD.WithholdingTaxtreatmentmayvaryfromportfoliotoportfoliowithinthiscomposite.Performanceresultscanbepresentedbothnetoffeesand/orgrossoffees.“Netoffees”performanceresultsarenetofmanagementfee.Clientswithaccountsinthecompositeincurotherexpensesinconnectionwiththeiraccountssuchascustodyfeesandothercosts.Netreturnshavebeencalculatedbaseduponthehighestfeeratechargedtoeachaccountinthecomposite.Fee Schedule: Returnsarenetoftradingexpensesbutgrossofcustodyfeesandothercosts.Netoffeesreturnshavebeencalculatedbaseduponthefollowingschedules:InceptiontoDec31,2012:grossreturnshavebeenreducedbyamodelfeerateof75bps.FromJan1,2013toApr30,2017:assetweightedactualnetreturnsfortheunderlyingaccountsFromApr30,2017:grossreturnshavebeenreducedbyamodelfeerateof75bps.Dispersion: Internaldispersioniscalculatedusingassetweightedstandarddeviationofallportfolioswherethereareatleast5portfoliosthatareincluded inthecompositefortheentireyear.Leverage: NoneoftheaccountsintheCompositeuseleverage.GIPS Compliance and Verification: SchroderInvestmentManagement(‘theFirm’)claimscompliancewiththeGlobalInvestmentPerformanceStandards(GIPS®)andhaspreparedandpresentedthisreportincompliancewiththeGIPSstandards.TheFirmhasbeenindependentlyverifiedfortheperiodsJanuary1,1996toDecember31,2018.Theverificationreport(s)is/areavailableuponrequest.Verificationassesseswhether(1)theFirmhascompliedwithallthecompositeconstructionrequirementsoftheGIPSstandardsonafirm-widebasisand(2)theFirm’spoliciesandproceduresaredesignedtocalculateandpresentperformanceincompliancewiththeGIPSstandards.Verificationdoesnotensuretheaccuracyofanyspecificcompositepresentation.Acompletelistofallcompositesandtheirdescriptionsisavailableuponrequest.Additionalinformationregardingpoliciesforcalculatingandreportingreturnsisavailableuponrequest.Additional Information:TheexchangeratesusedareprovidedbyWM.Eachcurrencyisvaluedat4pmonthelastbusinessdayofthemonth.Additionalinformationregardingpoliciesforvaluingportfolios,calculatingandreportingreturnsandadescriptionofallcompositesareavailableonrequest.Risk Statistics:UnavailabilityStandardDeviationsforcompositeanditsbenchmarkthathavenotbeenactiveorinexistencefor3yearsormoreare notprovidedinthepresentation.
A primer on securitisation18
Thereturnsarepresentedasgrossreturns,includingcash,reinvestmentofdividends,interestandotherincomeearnedintheperiodandarecalculatedonatradedatebasisaftertransactioncharges(brokeragecommissions),butbeforetaxesandmanagementandcustodyfees.Performancewouldhavebeenreducedbysuchfeesandtheeffectofthesefeesonperformancecompoundsovertime.
Asanillustrationseethechartbelow.Thevalueofa$5,000,000accountwouldbereducedbythefollowingamountsduetothecompoundeffectofthemanagementfees.(Thishasbeencalculatedassuminganassumedconstantreturnof10%perannum*andahypotheticalmanagementfeeof0.75%perannum,whichhasbeenappliedonasimpleaverageofopeningandclosingannualfundvalues).
Gross value Net value Compound effect
1Year $5,500,000 $5,460,625 $39,375
3Years 6,655,000 6,513,090 141,910
5Years 8,052,550 7,768.403 284,147
10Years 12,968,712 12,069,617 899,095
*Theassumed10%returnishypotheticalandshouldnotbeconsideredarepresentationofpastorfuturereturns.Theactualeffectoffeesonthevalueofanaccountovertimewillvarywithfuturereturns,whichcannotbepredictedandmaybemoreorlessthantheamountassumedinthisillustration.Actualfeesmaydifferfromtheassumedratepresentedabove.PleaseconsulttheFirm’sAdvisoryBrochure(ADVPart2)foradescriptionofthefees.
Important information
19A primer on securitisation
Important information: Theviewsandopinionscontainedhereinarethoseoftheauthorsasatthedateofpublicationandaresubjecttochangeduetomarketandother conditions.SuchviewsandopinionsmaynotnecessarilyrepresentthoseexpressedorreflectedinotherSchroderscommunications,strategiesorfunds.Thisdocumentisintendedtobeforinformationpurposesonly.Thematerialisnotintendedasanofferorsolicitationforthepurchaseorsaleofanyfinancialinstrumentorsecurityortoadoptanyinvestmentstrategy.Theinformationprovidedisnotintendedtoconstituteinvestmentadvice,aninvestmentrecommendationorinvestmentresearchanddoesnottakeintoaccountspecificcircumstancesofanyrecipient.Thematerialisnotintendedtoprovide,andshouldnotbereliedonfor,accounting,legalortaxadvice.Anyreferencestosecurities,sectors,regionsand/orcountriesareforillustrativepurposesonly.InformationhereinisbelievedtobereliablebutSchrodersdoesnotrepresentorwarrantitscompletenessoraccuracy.NoresponsibilityorliabilityisacceptedbySchroders,itsofficers,employeesoragentsforerrorsoffactoropinionorforanylossarisingfromuseofalloranypartoftheinformation inthisdocument.Norelianceshouldbeplacedontheviewsandinformationinthedocumentwhentakingindividualinvestmentand/orstrategicdecisions.Schrodershasnoobligationtonotifyanyrecipientshouldanyinformationcontainedhereinchangeorsubsequentlybecomeinaccurate.UnlessotherwiseauthorisedbySchroders,anyreproductionofallorpartoftheinformationinthisdocumentisprohibited.Anydatacontainedinthisdocumenthavebeenobtainedfromsourcesweconsidertobereliable.Schrodershasnotindependentlyverifiedorvalidatedsuchdataandtheyshouldbeindependentlyverifiedbeforefurtherpublicationoruse.Schrodersdoesnotrepresentorwarranttheaccuracy orcompletenessofanysuchdata.Allinvestinginvolvesriskincludingthepossiblelossofprincipal.Notallstrategiesareavailableinalljurisdictions.Exchangeratechangesmay causethevalueofanyoverseasinvestmentstoriseorfall.PastPerformanceisnotaguidetofutureperformanceandmaynotberepeated.Thisdocumentmaycontain“forward-looking”information,suchasforecastsorprojections.
Pleasenotethatanysuchinformationisnotaguaranteeofanyfutureperformanceandthereisnoassurancethatanyforecastorprojectionwillberealised.Note to readers in Australia: ThismaterialhasbeenissuedbySchroderInvestmentManagementAustraliaLimited(ABN22000443274,AFSL226473).Itisintendedforprofessionalinvestorsandfinancialadvisersonlyandisnotsuitableforretailclients.Schrodersmayrecordandmonitortelephonecallsforsecurity,trainingandcompliancepurposes.
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