Schroder Credit Securities Fund
The Schroder Credit Securities Fund is an active strategy that predominantly invests in corporate bonds and other credit securities. The Strategy seeks diversity by investing across the corporate capital structure, geographically and across the credit ratings spectrum. The Strategy also has the flexibility to invest in cash and other debt securities (such as government bonds) to help preserve capital during downturns in the credit cycle. Adopting an absolute return approach, the most critical element of the investment process is to identify which assets to own and when to own them. This is then complemented by extensive credit research and expertise in individual credit selection. The targeted result is a well-diversified portfolio of corporate bonds and other debt securities with the potential to deliver consistent returns above cash and term deposits but with less risk and volatility than the equity market.
To outperform the RBA Cash Rate by 2.5% p.a. before fees over the medium term.
|Active strategy offering regular income stream and liquidity||
|Proven investment approach||
|Resourced to fully cover the universe||
- Market risk: includes the risk of volatility and negative returns arising from investment markets.
- Interest rate/duration risk: The performance of fixed interest and debt securities will be sensitive to movements in domestic and international interest rates (e.g. increases in interest rates result in the capital value of fixed interest investments falling).
- Credit risk: Credit risk arises when an issuing entity defaults, which results in a loss of capital to the Fund.
- Company risk: includes the risk of adverse changes to a company or its business environment.
For a comprehensive list of risks please refer to the PDS.
|Fund inception date||24 June 2002|
|Valuation||Every business day|
|Minimum investment||Wholesale class - $25,000
Professional class - $500,000
|Buy/sell spread^||0.20% on application; 0.20% on redemption|
|Management costs (ICR)||Wholesale class - 0.75% p.a.
Professional class - 0.54% p.a.
|Distributions||Normally last business day of March, June, September and December|
|APIR code||Wholesale class - SCH0103AU
Professional class - SCH0024AU
^Subject to change. Refer to the Buy/Sell spreads page in the Fund Centre
How the Fund is managed
The investment process for the Schroder Credit Securities Strategy is aligned with our broader fixed income investment philosophy – and similar to that applied to our multi-asset strategies.
We believe the credit universe is extremely diverse. As an example, it can be classified by factors such as term, subordination, structure, issuer rating and geography. This means significantly different outcomes can be achieved depending on where within the universe you are invested.
The breadth of this universe and the diversity of possible risk and return outcomes not only means active management is essential, but that getting the overall asset mix right is the single most important determinant of returns over time. This is then complemented by active security selection which is a critical element in identifying not only value in each individual security but more importantly identifying risks to avoid defaults.
Furthermore we believe investors in credit have an eye to absolute returns over time and as such view risk not as volatility but as losing money. While consistent income is a requirement of credit investors, income should not come at the expense of overall portfolio returns. The cyclical nature of credit returns means that at times significantly reducing overall market exposure to credit may be warranted.
Stage 1. Asset allocation
While asset allocation in fixed income is not typically well defined by the market, we break our asset allocation decisions into two distinct areas based on their overall impact on total portfolio return and risk. The first includes decisions with respect to sovereign bonds, credit, cash, geography, duration, yield curve and subordination. The second extends to credit sector selection (e.g. financials vs. non financials) and non-credit sector selection (e.g. government bonds, semi-government bonds, supranational debt and government guaranteed securities).
In developing the portfolio’s asset allocation, we start from an absolute perspective to construct an initial (or starting point) portfolio, unencumbered by any predetermined benchmark allocations. We combine our medium term expectations of fixed income asset class risk and return with shorter term views on market valuation, cyclical developments and liquidity considerations, matched against the Strategy’s objectives to develop appropriate asset allocation of the Strategy. By utilising the broadest opportunity set and actively managing these exposures in this part of the process, it helps to ensure we are in the right assets at the right time, which in turn helps us to achieve our broader portfolio goals such as delivering consistent returns with limited tolerance for drawdowns and a requirement for liquidity.
Stage 2. Security selection
Independent fundamental credit research and active management at the security level are essential elements of our approach which focuses on the avoidance of default and identifying value in individual securities. As debt investors we are investing our client’s money in assets with an asymmetric pay-off structure. In other words, we either get our coupons and capital back at term - or we get less; there is no upside in a “hold to maturity” environment so we need to avoid investing in securities where the risk of default is material if it is not reflected in the price. As such we undertake our own rigorous analysis and form our own independent views rather than rely on external ratings agencies to make this assessment. We will not invest in securities we haven’t researched.
Security selection within each of the underlying asset classes is carried out in a manner aiming to exploit those areas with the most potential for adding value. For this reason our security selection process differs for “credit” and “non-credit” securities.
Stage 3. Risk management
At the end of the asset allocation process we are able to identify broadly the portfolio structure(s) that will best meet the investment objectives. A key element of this process is to ensure that from a top-down perspective risk is being taken in the right places. To do this, we monitor a broad array of risk measures including examining those exposures and factors contributing to risk and the size of their risk contributions. This then feeds back into the portfolio construction process and will influence decisions relating to asset allocation position sizing.
With the broad portfolio structure set, risk management in the sector and security selection process focuses on achieving diversification by sector, industry, issuer, rating and seniority. Risk is referenced both in size of exposures, duration and credit spread duration. These estimates of the portfolio’s sensitivity to changes in risk premium ensure the appropriate level and contribution to risk are being held in the portfolio.
Stage 4. Implementation
The final stage of the investment process is implementation where our aim is to find the best ways to implement the investment decisions generated through this process.