Yields over the last decade
The 9 August 2017 was regarded by many as the 10 year anniversary of the global financial crisis. The European Central Bank (ECB) and the US Federal Reserve (Fed) ploughed c. £45 billion into financial markets that day as the credit crunch began. Astonishingly, the UK base rate on that day stood at 5.75%. Since the 5 March 2009, it has only ever been 0.50% or lower. This has been a punishing environment for savers, institutions and pension funds looking for a home for their cash, with the majority of accounts offering little or no interest on their money.
There have been a wider choice of opportunities within the credit market but investors have typically focused on just AAA-rated credit, as they lack the credit expertise. Although considered to be the most ‘riskless’ asset, this safety is reflected in a more limited return profile. At Canada Life Investments, the CF Canlife Sterling Liquidity Fund was launched in response to this need. As a business, we have been managing fixed income assets for more than 50 years and we believe our current team has a long-term standing and expertise in this space. With regards to the CF Canlife Sterling Liquidity Fund, the management team of Steve Matthews and Andy Head have worked together since 2003 and also manage c. £5 billion of short bond and liquidity mandates for a number of institutional clients, as well as life and pension money funds.
Active credit management
Ultimately, it is the securities within our portfolios that are the biggest driver of returns and what we are paid to do as active managers is to select these credit opportunities on behalf of our clients. This is where Steve and Andy have the experience and relationships to be able to focus on providing an enhanced return relative to short-term bank deposits. One of the primary ways they are able to do this is through their ability to go down the yield spectrum, finding attractively priced opportunities without taking on undue risk. For example, the credit profile of the CF Canlife Sterling Liquidity Fund is shown below:
Credit rating breakdown
Source: Bloomberg & Canada Life Investments, as at 30/06/17.
We believe this portfolio allows investors to diversify their cash from pure bank deposits, provides them with high levels of liquidity and credit quality and generate an enhanced yield. Steve and Andy are supported in this by the credit analysis team at Canada Life Investments, which has in-depth knowledge of individual corporates and sectors, drawing on the firm’s long experience in annuity management. The team have a long heritage in fixed income investing, with a focus on strong credits, diversification and capital protection. This yield uplift can be highlighted through the use of carefully selected longer-dated assets. For example, one position within the CF Canlife Sterling Liquidity Fund is a General Electric bond maturing in June 2018 and delivering a money market yield (MMY) of 0.79%. In contrast, overnight deposits have a typical MMY of 0.15%.
With the uncertain economic and political outlook the UK is currently facing, we expect demand for efficient, secure vehicles for cash management to be well-supported. As long-term fixed income investors, it is our job in this environment to make our investors’ cash work as hard as possible, focusing on sustainable returns and capital protection.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments can fluctuate. The content of this article is not intended as investment advice.
The information contained in this document is provided for use by institutional investors, professional investors and professional advisers and is not for onward distribution to, or to be relied upon by, private investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
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CLI00889 Expiry 10 August 2018