The Great Court atthe British Museum

Asset Allocation Solutions for Pension & Insurance CompaniesJohn McLaughlin

Head of Multi Asset Solutions

May 2010 | For professional investors only. This material is not suitable for retail clients

2

Getting the balance rightIs a traditional balanced approach the answer?

1. Diversification is limited to 2 or 3 asset classes

2. Benchmark is not aligned to the client’s ultimate objective

3. Focus is greatest where the opportunity is least

4. Asset allocation is slow moving and lacks conviction

5. Risk management amounts to monitoring a tracking error

6. Liabilities are difficult to match using bonds and are not particularly capital efficient

Liabilities

Bonds Equities

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Static diversification is not enoughYou must also rebalance dynamically

Simple static diversification provides protection as the tech bubble collapses June 2000 – April 2006

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Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05

MSCI AC World £ hedgedDiversified Index £ hedged

Simple static diversification offers little protection in the current down turn April 2006 – June 2009

*Diversified Index: 50% MSCI AC World TR $,10% HFRI Fund of Funds Composite TR $, 7% JPM EMBI Global Composite TR $, 10% ML Global High Yield TR $, 10% FTSE EPRA/NAREIT Developed TR $, 3% LPX50 TR $, 10%DJ UBS Future Commodity Index ER $. Rebalanced on monthly basis. Source: Thomson DataStream, Schroders. Updated 30th June 2009.

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May 06 May 07 May 08 May 09

Schroder Diversified Growth Acc £

MSCI AC World £ hedged

Diversified Inex £ hedged

Dynamic multi-asset investingSay ‘No’ to the traditional approach

No Benchmark

Target an absolute risk/return outcome

No Limits

Broad diversification by

Asset type

Risk source

Investment vehicle

Equity Hedge Funds

Property High Yield

Private Equity

Com-modities

CurrencyInfra-structure

Cash Equity Illiquidity SkillTerm Credit Volatility

Easy to say, not so easy to do ….. successfully

No Surprises

Construct portfolios based on risk weighting, not trade weighting

Observe and control the portfolio through different risk lenses e.g. VaR, factor risk, liquidity risk

Use customised, quantitative risk management tools

No Fear

High conviction asset allocation:

• Capital rotation through the market cycle

• Taking advantage of valuation opportunities

• Realising investment themes

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Equity

Determine Investment Policy

– Asset class preferences

– Conviction & Accountability

– Set stop-loss/take-profit

Global Asset Allocation Committee

Gather Information

– Outlook for asset classes

– Specialist views

– Discuss economic scenarios

Cyclical Market Forum

Models & economic cycle analysis

InvestmentStrategy

22 Fund Managers and Analysts

Construct Portfolios

– Sizing positions

– Fund / Vehicle selection

– Monitor risk & return

Fund Management & Analysis

Schroders asset allocation modelAsset allocation is hard to do well

Alternatives

5 Independent Multi-Asset Specialists

40+ Senior Fund Managers / Analysts

53

163

67

Fund Managers

& Analysts

Fixed Income

Quarterly Monthly Daily

Source: Schroders, 31 December 2009*Team of 30 includes portfolio management, quant analysis, research, trading and support

5 macro economists

Optimisation, risk analysis, hedging

Risk Management

16 quants and derivative experts

Specialist resources are necessary - lots of them

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− Global asset allocation committee members sponsor and co-sponsor ideas

− Challenged by colleagues

− All ideas structured as long/short positions

− Analysis to ensure risk control and diversification

− Implemented quickly, to take advantage of market conditions

− Accountable and transparent process

Global Asset Allocation Committee

Global Asset Allocation

Committee (monthly)

5 Voting MembersAlan Brown, Keith Wade, Johanna Kyrklund,

Simon Doyle and Richard Coghlan

Keith WadeCashvs.Short Equities

Keith WadeJohanna KyrklundG3 Currencies

vs.Long Emerging Market Currencies

Johanna Kyrklund

Alan Brown

Co-SponsorSponsor

Long High Yield Debt

vs. Cash Johanna Kyrklund

Long Investment Grade

vs. US Government

Bonds

Keith Wade

Long Pacific Basin Equities

vs. US Equities

Richard CoghlanCashvs.Long Equities

Johanna KyrklundG3 Currencies

vs.Long Emerging Market Currencies

Simon Doyle

Alan Brown

Co-SponsorSponsor

Long High Yield Debt

vs. Cash Johanna Kyrklund

Long Investment Grade

vs. US Government

Bonds

Keith Wade

Long Can $ vs. Australian $ Richard Coghlan

Source: Schroders, for illustration only

Asset allocation in practiceGetting ideas into the portfolio – the Schroders way

Implementing your ideas efficiently – Active or Passive funds ?Getting “Bang for your Buck”

Source: Lipper Hindsight, February 2010

Percentage of funds outperforming benchmark

– Some benchmarks are much harder to beat than others

– Focus on selecting actively managed strategies only in inefficient asset classes where high probability of achieving positive alpha exists

– Avoid paying active management fees where probability of positive alpha is low by selecting low cost passive funds

Index +1% +2% +3%

European Money market 5 1

Swiss Equities 12 2

European Govt Bonds 15

Japanese Small Caps 16 10 6 3

UK Equities 20 16 8 3

US Agg Bonds 21 9 5 4

Emerging Market Debt 23 4 3 2

Emerging Market Equity 24 13 8 5

Japanese Equities 24 18 13 9

European Corp Bonds 28 14 4

European Equity 32 22 14 13

Global Equities 35 30 24 18

Global Energy 40 16 9

European Small Caps 46 36 32 27

European Financials 50 23 21 19

US Small Caps 53 45 36 29

UK Agg Bonds 57 25 9 2

Efficient (Passive)

Inefficient (Active)

SMART (Schroders Multi-Asset Risk Tool)

• Multi-Asset Portfolio Construction

• Risk Reporting and Decomposition

• Portfolio Simulations

• … and much much more

The right tools also make a big difference

Portfolio construction

-10-8

-6-4-20

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Recovery

Expansion

Slowdown

Recession

Estimated USOutput GapBaseline forecast

Recession

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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Recovery

Expansion

Slowdown

Recession

Estimated USOutput GapBaseline forecast

Recession

-3-2-101234

90 92 94 96 98 00 02 04 06 08 10

Normalised over10 years

+/- 1 SD

Equities cheap

Equities expensive

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Equity total returnY-on-Y %

BUY equities

Sell equities

Quantitative frameworkCyclical model1

Valuation model2

Momentum model3

1 Source: Congressional Budget Office (CBO), Thomson DataStream, Schroders 2 Source: Thomson Datastream. Normalised Earnings yield minus bond yield3 Source: Thomson Datastream. Equity year on year return

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Source: Schroders. Chart shows monthly performance for the Global Tactical Asset Allocation portfolio. The Strategy was operating on a live basis in a managed account with £4 million of Schroder seed capital from January 2008 until April 2009. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed.

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Global Tactical Asset Allocation 3 month £ LIBOR

Ann. strategy return: 9.80%Ann. strategy volatility: 6.41%Ann. LIBOR return: 2.93%Ann. excess return: 6.87%

Solution 1: Global Asset AllocationProof that the processes and the resources work!

Investment Features

– Aims to provide absolute returns which are uncorrelated with other asset classes

– Performance target of 10% above cash gross of fees over rolling 12 months

– Volatility target of 10-15% p.a.

Benefits

– Almost all positions implemented through derivatives, keeping transaction costs low

– Fund uses Schroder’s proprietary risk software to optimise allocations and manage risks

– More liquid and transparent than many macro funds

– Diversifying within portfolio

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Solution 2: Diversified Growth FundEquity like returns with 2/3 the risk of equities

Source: Schroders as at 26 February 2010. Please note that this is indicative exposure only and may change, subject to market conditions and outlook*Private Equity includes allocation to Schroder PEFOF IV plus 1 listed externally managed fund. Total may not sum to 100 due to rounding

Externally Sourced

Schroder ISF US Small & Mid Cap 9%Schroder ISF QEP Global Quality 7%Schroder ISF QEP Global Active Value 6%Schroder ISF European Special Situations 3%Schroder ISF Emerging Markets 3%Schroder ISF Asian Equity Yield 3%Schroder ISF European Equity Alpha 2%Schroder ISF European Allocation1%Passive Equity Derivatives 10%

Equities 44%

Commodities 10%

Convertibles 4%

Inv. Grade Bonds 6%

High Yield Bonds 9%

Em. Market Debt 11%

Private Equity 2%

Cash 8% Cash 8%

Property 4%Schroder ISF Asia Pacific Property Securities 3% Invista Foundation Property Trust REIT 1%

Private Equity* 2%

Absolute Return 2% JP Morgan Highbridge Statistical Market Neutral Fund 2%

Infrastructure 3% International Public Partnerships 2%HSBC Infrastructure Company Ltd Ordinary1%

Schroder ISF Emerging Market Debt Absolute Return 6%PIMCO Emerging Market Bond Fund 5%

Schroder ISF Global High Yield 6%Bluebay High Yield Fund 3%

Schroder ISF EURO Corporate Bond 3%Vanguard Inv Grade Credit Fund 3%

Schroder ISF Global Convertible Bond 4%

Schroder AS Commodity Fund 4%Schroder ISF Global Energy 4%ETFS Gold 2%

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ctica

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trate

gic

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Time

A smoother path of returns over time

Global Equities

Diversified Growth Fund

CPI +5%

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Source: Schroders, as at 1 March 2010

Designed specifically to ‘complete’ a growth portfolio of equities

Targets cash + 4% p.a. over rolling 5 year periods

Maintains a beta of less than 0.5 to equities

Full ongoing governance responsibility

– Manager selection

– New asset classes as appropriate

Transparent fees

Return from Dec 07 to Dec 09: +5.8% p.a.

Solution 3: Diversified Completion FundFully managed access to alternative investments

Asset Allocation as at 1 March 2010

High Yield Debt 19% Commodities 14%

Hedge Funds 11% Emerging Market Debt 11%

Infrastructure 7% Catastrophe Risk 6%

Property 6% Leveraged Loans 4%

Private Equity 3% Active Currency 2%

Convertible Debt 2% Cash 15%

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Strategy Equity Market

Solution 4: Global Dynamic Balanced Fund

Return %

Source: Schroders, Datastream as at 31st December 2009. Backtested performance until 31st December 2008, live performance from 1st January 2009. Live performance is gross of fees using NAV for I shares. The simulated results must be considered as no more than approximate representation of the strategy’s potential performance. They are the result of back-testing quantitative research results, which are based on a number of assumptions. There are a number of limitations on the retroactive reconstruction of any performance results based on simulations. Past performance is not a guarantee of future results

Schroder Global Dynamic Balanced Fund

– Like the Diversified Growth Fund, but with a systematic overlay that exits the market during a downturn

– Aims to limit drawdowns to -10% in the worst years for risk assets

– Active allocation to risk assets, between 0% and 60%

Limiting the downside

Calendar Year Performance

Avoiding bursting of tech bubble

Avoiding worst of credit crunch

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New solutions: Real assets fundThe ‘real’ answer to future inflation?

Asset Strategic Weights

Current Views

DJ AIG CMCI Commodity Index

25% 28%

TIPS 20% 10%

CS Leveraged Loans 10% 12%

ELMI+ 10% 20%

FTSE EPRA/NAREIT Global

10% 3%

MSCI Energy 10% 10%

MSCI Metal and Mining 10% 7%

MSCI EM 5% 5%

High dividend stocks n/a 5%

-60%

-40%

-20%

0%

20%

40%

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80%

88 90 92 94 96 98 00 02 04 06 08% c

on

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CP

I- U

y/y

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88 90 92 94 96 98 00 02 04 06 08% c

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I- U

y/y

Source: Bureau of Labour Statistics, Data Stream, Schroders. *Food and beverages & non durables less food and beverages

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Commodities*

Rent of shelter

Durable goods

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Year 10 Year 25

Monthly drawdown paymentsfrom Year 11 to Year 25.

Coupons are deducted from the NAV

Drawdown Period

Maximum allocation to growth assetsNo drawdown distribution

Accumulation Period

Payments set at 5% p.a.of highest recorded NAV

during the accumulation period

Protected Drawdown

100%

Inception

NAV

Highest NAV

Final NAV is paid out to the investor.A proportion of the Bonus Payout

will be incrementally protectedif the NAV of the fund is high.

Bonus Payout*

* Subject to market conditionsSource: Schroders

New solutions: DC pensions market‘Pension Plus’ – your retirement supplement

Liabilities

Bonds

Bonds Equities

Bonds for liability coverage

– Accuracy of liability matching is limited

– Extent of coverage broadly limited to size of bond portfolio

– Low expected return

– However, longer dated gilt yields are higher than swap yields

LDI Swaps

Swaps Growth assets

Liabilities

Swaps for liability coverage

– Better accuracy of liability matching

– Extent of coverage can be much larger than assets in LDI portfolio

– Frees up assets to pursue growth strategies

– Lower yields at longer maturities than gilts

Matching liabilities – bonds or swaps?A Comparison

Source: Schroders, for illustration only

Backing assets

Liability coverage

Return Generating AssetsCash

Dynamic Allocation

Key :Liabilities

Interest rate and inflation swaps

Return Generating AssetsCash Buffer

Swap Overlay

Portfolio Structure

Portfolio Management

Cash Holdings

10% 5%

Interest rates fall / Inflation rises

Interest rates rise / Inflation falls

Note: Percentages shown above for illustration only. Actual amounts depend on the structure of the hedge

Source: Schroders, for illustration only

Liability Driven InvestmentReducing liability risks - using swaps rather than bonds

85%

Schroders LDI – the third generation solutionPlatform structure and management

Dynamic Allocation

Key :Liabilities

IRS and inflation hedge

Cash Fund Return generating assetsCollateral

Liability management

Return Generating AssetsCollateral

Portfolio structure

Portfolio management

Cash Holdings

Cash movement

Cash movement

Synthetic credit

Longevity swaps

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Conclusion

– Diversification is your first defence against market uncertainty

– But diversification by itself is not enough, it must also be dynamic

– Your asset allocation is what matters most – so make it your main focus

– Be obsessive about risk, and the returns will look after themselves

– Risk and return objectives should be ‘real’, not ‘relative’

– Be capital efficient when matching your liabilities

Say ‘No’ to a traditional balanced approach; say ‘Yes’ to dynamic asset allocation

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For Professional Investors only. Not Suitable for Retail Clients

This presentation is 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. Schroders has expressed its own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroder Investment Management Ltd (SIM) does not warrant its completeness or accuracy. This does not exclude or restrict any duty or liability that SIM has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system

The forecasts stated in the presentation are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic, and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today's date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change

Issued in July 2009 by Schroder Investment Limited, 31 Gresham Street, London EC2V 7QA. Registration No 2015527 England

Authorised and regulated by the Financial Services Authority

Important information