A Standard Life Investments presentation on
This communication is intended for investment professionals only and must not be relied on by anyone else.
Inflation Linked bondsJonathan Gibbs – Head of Real Returns
October 2009
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Standard LifeInvestments
Agenda
Standard LifeInvestments
• The case for inflation in portfolios
• Inflation products from Standard Life Investments:ProcessProduct rangePerformance
• Outlook
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Standard LifeInvestments Standard Life Investments
Highly regarded fixed interest team
Key messages
Source: Standard Life Investment, 30 June 2009
• Large, stable Insurance Company parent
• Major fixed income investor – €61.2bn€4.2bn Inflation Linked
• Standard Life Investments is a leading player in inflation marketsglobally
• A robust and flexible process to govern our investment strategy
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Standard LifeInvestments Global & Euro Inflation Linked Funds
• UCITS III SICAV (Lux.)
• Benchmark: Barclays Global Index Linked – hedged to US$
• Target outperformance: 0.5% gross of fees
• UCITS III SICAV (Lux.)
• Benchmark: Barclays Euro Inflation Linked Bonds
• Target outperformance: 0.5% gross of fees
Global Inflation Linked Bond Fund
Euro Inflation Linked Bond Fund
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Standard LifeInvestments Performance vindicates the process
1 Year%
2 Years% p.a.
3 Years% p.a.
5 Years% p.a.
Index Linked Fund -1.25 6.99 5.43 6.73
FTSE BG Ind Linked >5yrs -2.28 6.65 5.14 6.41
Relative return 1.05 0.31 0.28 0.31
Euros 1 Year%
2 Years% p.a.
3 Years% p.a.
Since Inception% p.a.*
SICAV Euro Inflation Linked Bond Fund 7.63 7.21 4.33 3.98
* Inception: 01/04/2005 ** Inception:01/06/2005
OEIC Global Index Linked Bond Fund 1.42 6.78 5.38 5.86
SICAV Global Inflation Linked Fund 1.70 6.05 4.95 4.67
Barclays Gbl Inf Lnkd Bd (Hgd US) 1.31 5.65 4.59 4.39
Relative return 0.38 0.38 0.34 0.28
Barclays Global Inflation IL Bond 0.97 6.54 5.15 5.68
Relative return 0.44 0.22 0.22 0.17
Barclays Euro Infl Linked Bonds 6.31 6.35 3.82 3.61
Relative return 1.25 0.80 0.49 0.35
1 Year%
2 Years% p.a.
3 Years% p.a.
5 Years% p.a.
US$ 1 Year%
2 Years% p.a.
3 Years% p.a.
Since Inception% p.a. **
Source: Source: Standard Life Investments, gross performance to 31 August 2009 in local currency.Standard Life Investments claims GIPS compliance with the Global Investment Performance Standards (GIPS®).
Performance to 31 August 2009
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Standard LifeInvestments A growing asset class, and in focus
• Market capitalisation now above $1.4trn, giving real critical mass
• Eurozone continues to expand – new issuers coming?
• Japan to rebase and re-issue its market in 2010?
• China seeks commitment to expansion of TIPS programme – a huge potential buyer
• US Treasury keen to expand issuance
• UK issuance to remain large for forseeable future
• Australia to reopen inflation issuance
Source: Bloomberg, 10 August 2009
MV weights in benchmark index by country
SW, 2.4%AU, 0.6%
JP, 5.2%
CA, 2.8%
GE, 2.7%GR, 1.5%
IT, 10%
FR, 15.4%
UK, 22.9%
US, 36.6%
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Standard LifeInvestments The case for global inflation
• Broader opportunity set than domestic portfolios
• Access to global liquidity pool
• Derivatives widen opportunities further
• A powerful diversifier
Source: Bloomberg, 15 September 2009
Distribution by size and maturity in benchmark index
0
5
10
15
20
25
30
35
40
2005 2015 2025 2035 2045 2055 2065
UK US FR(i) FR(ei) IT CA AU SW JP GE GR
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Standard LifeInvestments A broad product range for our clients
Overseas Governments
€14.0
Corporates€24.0
Index-Linked€4.2
UK Governments€19.0
• ProductsGlobal Inflation SICAV (USD)Euro Inflation SICAV (EUR)Global Inflation OEIC (GBP)UK Inflation fundsOther currency share classes forthcoming
• Diverse client base Corporate pension schemesLocal authoritiesInsurance companiesGlobal distributorsPrivate Wealth Management
Total €61.2bn
Source: Standard Life Investments, 30 June 2009A conversion rate of £1:€1.174098 as at 30 June 2009 has been used throughout the presentation unless otherwise stated
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Standard LifeInvestments Fixed Income resource
Head of Fixed IncomeEuan Munro
Rates & Real ReturnsJonathan GibbsTamsin Balfour
Katy RossGregor Macintosh
Philip LaingIan Pizer
Grant PeterkinJack Kelly
Credit and AggregateAndrew SutherlandCraig MacDonaldRoger SadewskyAlasdair MacLean
Andrew FraserChris Hekscher
Thomas RahmanFiona Dickinson
Saida EggerstedtDaniela MacIntosh
Erlend LochenJoanna DormerArthur Milson
Samantha LambFeryal Taki
Craig McLeod
Strategy Team Corporate Governance
Property team
Equity Team
Treasury team
Multi-Asset Investing
Average Years Experience Average years atStandard Life Investments
16 corporate bond specialists 15 8
79 government bond specialists 13
Critical mass of relevant skill setsSeptember 2009
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Standard LifeInvestments Process - dynamic idea generation
What is driving markets?
Weakdriver
Strongdriver
Fundamentals
Value
Sentiment
Technical
Assessment of an investment strategy
• Uses focus on change philosophy
• Recognises changing strength of groups of market drivers
• Enabling greater flexibility of thought than pure fundamental analysis
• Investment ideas continuously assessed as market conditions change
• Enables dynamic assessment of investment ideas
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Standard LifeInvestments Process – Leveraging ideas across funds
• Global approach ensures ability to add value
• A mix of cash instruments and standard derivatives are used as appropriate
• Positions applied across all possible benchmark groups
A global opportunity set for all products
Momentumstrategies
Duration
Steepeners
Breakeven Inflation
Flatteners
Cross market
Steepeners
GovernmentFixed
couponbonds
Currencies
BenchmarkCreditGovernment
Inflation-linked bonds
Cross market
Market timing indices
Hedged
Country Selection
Carry
models
Duration
Country Selection
Flatteners
Physical allocation
CDS Indices
StockSelection
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Standard LifeInvestments Inflation volatility on the rise?
Source: Bloomberg, 30 April 2009
Monthly change in y/y UK RPI and US CPI rates since 1980
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-
81
Jan-
83
Jan-
85
Jan-
87
Jan-
89
Jan-
91
Jan-
93
Jan-
95
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Jan-
07
Jan-
09
US
UK
• Inflation rates likely to be much less predictable than we have become used to
• Extraordinary forces and unprecedented policy measures make an unpredictable cocktail
• In times of uncertainty a balance of bets becomes even more important
• Global inflation provides significant diversification benefits
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Standard LifeInvestments US inflation is not priced in
Source: Bloomberg, 10 August 2009
US CPI (nsa), long term
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Dec
-59
Dec
-62
Dec
-65
Dec
-68
Dec
-71
Dec
-74
Dec
-77
Dec
-80
Dec
-83
Dec
-86
Dec
-89
Dec
-92
Dec
-95
Dec
-98
Dec
-01
Dec
-04
Dec
-07
long term ave cpi
current 10yr BE
• US CPI has spent 79% of the last 49 years above the level currently priced in
• So despite a rally in breakevens, US inflation insurance is cheap in light of massive stimulus
• This represents a very cheap insurance policy in uncertain times
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Standard LifeInvestments Summary
• Standard Life Investments is a leading player in inflation markets globally
• We have the process to deliver performance, and the track record to prove it
• We have a large and expanding range of inflation products
• The economic outlook is highly uncertain, making diversified risk vital
• The market is pricing in very low levels of long term inflation
• Fix your roof while the sun shines!
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Standard LifeInvestments Speculators influencing commodities?
• Other real assets have performed very well
• Equities and commodities appear to be discounting a recovery
• But there are signs that there may be significant speculation in some assets
• There will be few straight lines in this recovery
Source: Bloomberg, 3 August 2009
Ratio of spot oil and natural gas futures
0
5
10
15
20
25
30
31/1
2/20
07
31/0
1/20
0829
/02/
2008
31/0
3/20
08
30/0
4/20
08
31/0
5/20
0830
/06/
2008
31/0
7/20
08
31/0
8/20
0830
/09/
2008
31/1
0/20
08
30/1
1/20
08
31/1
2/20
08
31/0
1/20
0928
/02/
2009
31/0
3/20
09
30/0
4/20
09
31/0
5/20
0930
/06/
2009
31/0
7/20
09
31/0
8/20
09
Peak in oil
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Standard LifeInvestments Trade outlook becomes more crucial
Source: Bloomberg, 10 August 2009
Baltic dry index and US 10yr yields, 2008
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
31/12
/2008
31/01
/2009
28/02
/2009
31/03
/2009
30/04
/2009
31/05
/2009
30/06
/2009
31/07
/2009
31/08
/2009
10/09
/2009
2.2
2.4
2.6
2.8
3
3.2
3.4
3.6
3.8
4
BDIUS10YR
• Commodities rally has been led by trade-related demand
• But fears emerging that China has been stock-piling resources without underlying demand
• Baltic indices often a good leading indicator for economic prospects
• Divergence with bond yields is growing
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Standard LifeInvestments Trade example - Peripheral Europe
Germany vs. Italy 10 yr Yields
Source: Bloomberg
Entry
Exit
Entry
Exit
-2
0
2
4
6
8
10
12
Jul-0
7
Aug-
07
Sep-
07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Feb-
08
Mar
-08
Apr-0
8
May
-08
Jun-
08
Jul-0
8
Aug-
08
Sep-
08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr-0
9
May
-09
%
• Implemented overweight Germany, underweight Italy Fundamental driver
• Long term concerns over Italy’s fiscal and credit issues
• Opened and closed at key technical levels
• Key driver of performance in 2008, and still a live issue
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Standard LifeInvestments Trade example – UK inflation swap curve
Source: Barclays RVI, 31 July 2009
UK 30yr minus 10yr inflation swap rates (bp)
0
10
20
30
40
50
60
70
80
90
10031
/12/
2008
14/0
1/20
09
28/0
1/20
09
11/0
2/20
09
25/0
2/20
09
11/0
3/20
09
25/0
3/20
09
08/0
4/20
09
22/0
4/20
09
06/0
5/20
09
20/0
5/20
09
03/0
6/20
09
17/0
6/20
09
01/0
7/20
09
15/0
7/20
09
29/0
7/20
09
Entry 18.5bp
Entry 18bp
Take profits at 42.5bp
• Given the risk of over-stimulus
• Implied path of future inflation expectations is too flat
• We have entered and exited this position…
• …then re-entered it at similar levels
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Standard LifeInvestments
• Value opportunity: France inflation over-valued relative to EU HICP
• Sell IL bond / buy nominal bond / receive inflation in swaps
• ECB policy may hurt France more than other countries, so look for inflation expectations to fall relative to others
Trade example – France/EU breakeven anomaly
Source: Bloomberg, 07 August 2009
France 2029 breakeven vs. EUR 20yr inflation swap
-20
-15
-10
-5
0
5
10
15
2019
/03/
2009
26/0
3/20
09
02/0
4/20
09
09/0
4/20
09
16/0
4/20
09
23/0
4/20
09
30/0
4/20
09
07/0
5/20
09
14/0
5/20
09
21/0
5/20
09
28/0
5/20
09
04/0
6/20
09
11/0
6/20
09
18/0
6/20
09
25/0
6/20
09
02/0
7/20
09
09/0
7/20
09
16/0
7/20
09
23/0
7/20
09
30/0
7/20
09
06/0
8/20
09
Entry @ 9bp
Target -20bp
bp
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Standard LifeInvestments
Euro Inflation Linked Bond Fund
Risk controlled environment
• Managing risk at multiple levels
Fund Specification Document
Front Office System
Independent Risk Team
Investment Governance
Client Account Managers
Investment Guidelines
Duration +/- 2 yrs
Tracking error 0.50% - 1.00%
Derivatives MV up to 100% of fund
FX Hedging 100%
Individual Sovereign Bonds Max 10%, 20% of a given Country
Credit Max 20%. Investment grade only
Cash Up to 10%
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Standard LifeInvestments
Global Inflation Linked Bond Fund
Risk controlled environment
• Managing risk at multiple levels
Fund Specification Document
Front Office System
Independent Risk Team
Investment Governance
Client Account Managers
Investment Guidelines
Duration +/- 2 yrs
Country allocation, Major Countries +/- 15%
Country allocation, Other +/- 10%
Derivatives MV up to 100% of fund
FX Hedging 100%
Individual Sovereign Bonds Max 10%, 20% of a given Country
Credit Max 20%. Investment grade only
Cash Up to 10%
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Standard LifeInvestments
Remember – past performance is no guarantee of future performance. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and cannot be guaranteed.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
Standard Life Investments may record and monitor telephone calls to help improve customer service. All companies are authorised and regulated by the Financial Services Authority. ©2009 Standard Life Investments. www.standardlifeinvestments.com