Schroder GAIA Wellington Pagosa Wellington Pagosa - Schroders
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Schroder GAIA Wellington Pagosa
Wellington Pagosa
Quarterly Fund Update – Q3 2020
Quarterly Review
Global equities rose by 6.7% (as measured by the MSCI World Net TR (local) index) for the second straight quarter,
ending with a year-to-date gain of 1.0%. Markets were bolstered by the impact of the massive fiscal and monetary
stimulus from governments and central banks, further signs of a recovery in global economic growth, and the
potential for Covid-19 vaccines in the near future. However, the recovery was threatened by the pandemic. The
worldwide death toll eclipsed one million, with infections escalating in Europe, the US, India, and Latin America.
Europe faced an alarming rise in cases, as the number of new infections reached record highs in some countries.
Global fixed income sectors generated positive returns over the third quarter. Global Covid-19 cases swelled amid
encouraging developments in vaccine trials, and economic data continued to rebound as restrictions eased in most
countries. Sovereign yield curves generally steepened, as accommodative central bank policies anchored front-end
yields and lifted inflation expectations. Fixed income credit spreads tightened, supported by expansionary fiscal
policies, including an agreement on the EU’s “Next Generation” recovery package; purchase programs by the US
Federal Reserve (Fed) and European Central Bank (ECB); and strong demand, even as corporate issuance set records
for the year.
Most currencies gained against the US dollar. The euro was among the top performing G10 currencies. The EU
recovery fund represents an important step toward fiscal union, which unlocks the euro’s potential to rival the US
dollar as a reserve asset. Despite this, the path to fiscal union is long and mired with risks, including several
upcoming elections in which voters could derail the initiative. The British pound also strengthened amid a broad
downturn in the US dollar, as market participants looked beyond the risk of negative UK policy rates, near-term
Brexit negotiations, and transition risks. EM performance was mixed. The Turkish lira, Russian ruble, Brazilian real,
and Argentina peso were the primary decliners, driven by idiosyncratic risks related to Covid-19, potential US
sanctions, unsustainable debt levels, and prospects of a slower rebound.
Global central banks maintained highly accommodative policy stances during the period. The Fed extended its
emergency liquidity provisions through the end of the year and unveiled a new inflation-policy framework that will
allow inflation to modestly exceed 2% without a hawkish policy response; however, it neglected to provide explicit
forward guidance on its asset purchase program. The ECB announced that it would ease bank regulations to free up
capital to boost lending. The Bank of England made no changes to its policy, although its economic projections hinge
on a comprehensive free-trade agreement with the EU. The bank provided mixed messages on the prospect of
negative interest rates. The Reserve Bank of New Zealand expanded its asset purchase program.
Against this backdrop, Schroder GAIA Wellington Pagosa recorded a net return of 0.8% in the third quarter, bringing
the year-to-date return to -0.5%. Within Schroder GAIA Wellington Pagosa, on a contribution basis, six of our eight
underlying strategies contributed to performance, including our growth (+92bps), financials (+63bps), health care
(+34bps), long/short credit (+26bps), energy (+22bps) and emerging markets macro (+18bps) strategies. Two of our
eight underlying strategies detracted, including capital cycles (-44bps) and developed market macro (-75bps)
strategies.
Schroder GAIA Wellington Pagosa Quarterly Fund Update – Q3 2020 1Our tactical beta equity strategies, which include our growth strategy, financials strategy, health care strategy, and
capital cycles strategy, accounted for 47.5% of the strategic allocation at the end of the second quarter. In the third
quarter, the energy strategy was added at a 10% allocation, bringing the tactical beta equity allocation to 57.5% of
Pagosa. In aggregate, these strategies started the third quarter with long exposure of 63.7% and short exposure of -
44.3%, for a net exposure of 19.4%. By the end of the quarter, they, with the addition of the energy strategy, had an
aggregate long exposure of 62.4% percent and short exposure of -41.2%, for a net of 21.2%.
Within our fixed income strategies, we started the quarter with a long duration position of 2.5 years and were long
2.4 years of credit spread duration, and ended the quarter net long, at 2.7 years of duration and 1.6 years of spread
duration.
Turning to performance, the top contributing strategies during the third quarter were the growth, and financials
strategies.
Growth was the top contributor during the quarter, capturing the upside in July and August and protected during the
weakness in equity markets in September. Following the selloff in March, we increased positions in companies that
we believed would not only survive, but also thrive from the impact of the crisis. These stocks, including Square
(electronic payments), Livongo (disease management), and Boston Beer (alcoholic beverages), were top
contributors during the third quarter. We had also initiated several positions in the second quarter in high-quality
companies that were hurt by Covid-19, but that we believed could emerge stronger on the other side of the crisis.
Several of these stocks, including Trane Technologies, were also additive during the third quarter.
Given the recent market weakness and surge in Covid-19 cases, we have been more cautious on moving forward with
recovery-oriented stocks. We have been trying to construct a portfolio for our growth strategy with a balance of
companies with a good secular growth outlook and of companies that are poised for recovery. We are aiming for
balance due to our hesitancy to build a portfolio around one specific outcome when the range of outcomes is
unusually high, especially as it relates to the election and progress towards a vaccine. We believe the economic and
health recovery will be more elongated and volatile, but we expect the market to remain focused on fiscal and
monetary policy. As there is a much wider range of outcomes in the months ahead, we intend to remain flexible in
our positioning.
Financials was also a top contributor during the quarter. Long positions were additive, contributing 3.8% to returns
while the short positions contributed modestly, at 0.4%. From a sub-sector perspective, insurance and fintech were
the largest contributors, while market hedges and small-mid cap US banks were the largest detractors. Within
insurance, on a single name basis, Lifenet Insurance, a Japanese life insurance company, was the top contributor.
The company had strong performance during the quarter given the strengthening in the online life insurance
market. Another notable contributor was Assurant, a global insurance company. Assurant is a spin out of Fortis’ life
insurance business, but today has grown to include a diverse set of specialty, niche-market insurance products
across property, casualty, extended device protection. The stock however continues to trade with other life insurers,
who have underperformed in the historic low interest rate environment.
Looking forward, we like banks which have the balance sheets and the earnings power to take reserves for potential
bad loans before problems crystallise and prepare for worst case outcomes. We prefer sectors where industry
dynamics are turning for the better, especially specialty commercial insurance & reinsurance. The cycle has turned
positive, with significant rate rises as the supply/demand has shifted in the favour of these companies following
Covid-19 related losses. We are also heavily invested in the capital-light, technology driven segments of the finance
sector where we continue to find an incredible array of opportunities. In emerging markets, we like countries where
policymakers are working in coordination with ample ammunition to deal with the current economic dislocations,
and where we can buy the best business franchises at prices that reflect the current fears but not the long-term
secular and structural potential.
Turning to detractors, discretionary/relative value strategy was the top detracting strategy during the quarter. Most
notably, our DM FX strategies struggled, given our long positioning in US dollar and Japanese yen versus shorts in
the Pound sterling and Euro. Detraction also came from our opportunistic equity, particularly our net long positions
in European names in capital markets, banks, and insurance, and DM rates strategies. This was only partially offset
by relative value strategies.
Schroder GAIA Wellington Pagosa Quarterly Fund Update – Q3 2020 2Positioning wise, at the end of the quarter, we remained counter-cyclically positioned. On the rates side, we changed
from net short duration to net long, driven by increased duration positions in Europe and UK. We believe the second
wave of pandemic and uncertainty about further fiscal spending plans will result in a longer economic recovery path
compared to earlier projects. We continued to have short duration positions in US 30-year, as we believe the Fed
policy shift to allow temporary inflation overshoot will gradually steepen the US yield curve. On the FX book, at the
end of the quarter, we remained long positions in safe haven currencies of JPY and USD versus shorts in EUR and
GBP, as we believe the second wave of virus outbreak in Europe, Brexit uncertainty, and possibility of negative policy
rates (in UK) all warrant a defensive stance in select European currencies. We reduced the shorts in EUR to partially
realise profits.
The second largest detractor was the capital cycles strategy given modest performance from the enduring asset
positions. Negative performance for the quarter was driven mainly by the short book. Longs contributed a modest
3.9%, while shorts detracted a meaningful 9.3%. On the short side, our broad market hedges which helped keep the
beta and the net exposure of the fund at low levels, were the largest detractors followed by our short semiconductor
theme. Despite the strong positive performance of the stocks during the third quarter, we continue to believe that
our fundamental thesis in semiconductors is intact, particularly because revenues, margins, and profits within the
industry have mostly stagnated. As the trade war tension continues and the incentive for China to build out its
semiconductor industry plays out, we believe that the margins of the industry will be at risk. Our long positions in
commodities and precious metals were the biggest contributors in this quarter, driven by long positions in silver and
in Fresnillo, an Anglo-Mexican precious metals mining company. Both positions have been key beneficiaries of rising
precious metal prices due to fears over financial stability under the Covid-19 pandemic.
We continue to believe that the market strength is not taking into account the underlying fundamental backdrop in
the economy, with high employment, weak consumer confidence, and are watching for volatility around the
upcoming US presidential elections. Our net exposure remains at the relatively low end of our historical range, and
while gross exposure has decreased modestly, remains relatively high. Looking forward, we are continuing our work
on segments of the market that have been most dislocated by the effects of Covid-19, including airports, office space,
and hotels. We have also been positive on the outlook for electric vehicles where we believe names in the lower part
of the value chain will benefit from the industry growth.
Quarterly performance
Month to date Quarter to date Year to date Inception to date
performance performance performance performance1
Schroder GAIA Wellington Pagosa -0.3% 0.8% -0.5% 4.3%
MSCI World Net TR Index (Local) -2.9% 6.7% 1.0% 19.0%
Q3 ’19 – Q3 Q3 ’18 – Q3 Q3 ’17 – Q3 Q3 ’16 – Q3 Q3 ’15 – Q3
‘20 ‘19 ‘18 ‘17 ‘16
Schroder GAIA Wellington Pagosa 2.0% 2.2% - - -
MSCI World Net TR Index (Local) 8.6% 2.9% - - -
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from
them may go down as well as up and investors may not get back the amounts originally invested. The fund is not managed with
reference to a benchmark but its performance may be measured against one or more.
Source: Schroders as at 30 September 2020. 1Fund launch: 28 February 2018. All fund performance data is for the C accumulation USD share
class, on a NAV to NAV basis, net income reinvested.
Schroder GAIA Wellington Pagosa Quarterly Fund Update – Q3 2020 3Risk considerations
ABS and MBS risk: The fund may invest in mortgage or asset-backed securities. The underlying borrowers of these
securities may not be able to pay back the full amount that they owe, which may result in losses.
Contingent convertible bonds: The fund may invest in contingent convertible bonds. If the financial strength of the
issuer of a contingent convertible bond falls in a prescribed way, the value of the bond may fall significantly and, in
the worst case, may result in a total loss of the amount invested.
Counterparty risk: The fund may have contractual agreements with counterparties. If a counterparty is unable to
fulfil their obligations, the sum that they owe to the fund may be lost in part or in whole.
Credit risk: A decline in the financial health of an issuer could cause the value of its bonds to fall or become
worthless.
Currency risk: The fund may lose value as a result of movements in foreign exchange rates.
Derivatives risk – efficient portfolio management and investment purposes: Derivatives may be used to manage
the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the
derivative and may result in losses to the fund. The fund may also materially invest in derivatives including using
short selling and leverage techniques with the aim of making a return. When the value of an asset changes, the value
of a derivative based on that asset may change to a much greater extent. This may result in greater losses than
investing in the underlying asset.
Emerging and frontier markets & high yield bond risk: Emerging markets, and especially frontier markets,
generally carry greater political and legal risks than developed markets. Emerging markets and high yield bonds
(normally lower rated or unrated) carry greater counterparty, credit, operational and liquidity risk.
Event risk: The fund will take significant positions on companies involved in mergers, acquisitions, reorganisations
and other corporate events. These may not turn out as expected and may result in significant losses to the fund.
IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative
reference rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may
impact the investment performance of the fund.
Interest rate risk: The fund may lose value as a direct result of interest rate changes .
Liquidity risk: In difficult market conditions, the fund may not be able to sell a security for full value or at all. This
could affect performance and could cause the fund to defer or suspend redemptions of its shares.
Market risk: The value of investments can go up and down and an investor may not get back the amount initially
invested.
Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may
result in losses to the fund. Performance risk: Investment objectives express an intended result but there is no
guarantee that such a result will be achieved. Depending on market conditions and the macro economic
environment, investment objectives may become more difficult to achieve.
Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will
be achieved. Depending on market conditions and the macro economic environment, investment objectives may
become more difficult to achieve.
Stock Connect risk: The fund may be investing in China "A" shares via the Shanghai-Hong Kong Stock Connect and
Shenzhen-Hong Kong Stock Connect which may involve clearing and settlement, regulatory, operational and
counterparty risks.
Schroder GAIA Wellington Pagosa Quarterly Fund Update – Q3 2020 4Fund terms
Key features
Investment focus Multi-strategy
Launch date 28 February 2018
Dealing frequency Weekly (every Wednesday), and on the last business day of each month
Deal cut off 13.00 Luxembourg time three business days preceding a dealing day
Settlement Three business days following a dealing day
NAV publication Daily on T + 1
Base currency USD
Source: Schroders as at 30 September 2020.
Share Classes A1 A C
Minimum Initial Subscription/
USD 10,000 USD 10,000 USD 10,000
Minimum Holding
Initial Charge Up to 2% Up to 3% Up to 1%
Investment Management Fee 2.00% 2.00% 1.25%
Ongoing Charges 2.95% 2.45% 1.70%
Distribution Fee 0.50% None None
20% of the outperformance over BBA Libor USD 3 Month Act 360* subject to a High
Performance Fee Water Mark
*Currency equivalent cash hurdles used for currency hedged share classes.
1
Ongoing charges shown for base currency share classes and are estimated and may vary from year to year. Please note Ongoing Charges include the
above stated Investment Management Fee.
Source: Schroders as at 30 September 2020.
Investment management and distribution fee: percentages are stated with reference to the net asset value of the fund or the net asset Value
per share, as may be appropriate. The ongoing charges figure is as at 30 June 2020 and may vary from year to year. Please note ongoing
charges include the above stated investment management fee.
If you require any further information on the Schroder GAIA fund range, please let us know.
Schroder GAIA Wellington Pagosa Quarterly Fund Update – Q3 2020 5Important Information
This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder
GAIA (the “Company”). Nothing in this email should be construed as advice and is therefore not a recommendation to
buy or sell shares.
Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document
and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if
published), copies of which can be obtained, free of charge, from Schroder Investment Management (Europe) S.A.
An investment in the Company entails risks, which are fully described in the prospectus.
Past Performance is not a guide to future performance and may not be repeated. The value of investments and the
income from them may go down as well as up and investors may not get back the amounts originally invested.
Schroders will be a data controller in respect of your personal data. For information on how Schroders might process
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