The LF Canlife Sterling Liquidity Fund is designed to provide institutional investors with a high degree of capital security and daily liquidity via a conservative, but flexible approach to cash and fixed income investing. Launched in July last year, we believe the Fund offers diversification versus bank deposits combined with high levels of liquidity and credit quality.
Offering solutions in a rising rate environment
Recent economic and political newsflow has centred on the switch from the extraordinarily loose monetary policy of the last decade, to a regime of global monetary tightening. As a result, we are witnessing higher interest rates and government bond yields across the developed world. This means we need to ensure we are at the forefront of the marketplace, in making sure we get the best possible risk-adjusted returns on our investors’ short-term deposits.
Recent market moves
Earlier in 2018, the Fund benefited from 3 Month LIBOR rebasing from 50bps towards 75bps, in anticipation of a May interest rate rise from the Bank of England. Prior to this, we had been increasing our exposure to floating rate notes (FRNs) to take advantage of these higher yields. However, we also managed to pick up some fixed coupon instruments as LIBOR crept up towards 75bps.
This immediately benefited the Fund when May’s rise did not materialise. Further benefits were gained through selectively picking up some 2 year FRN bonds, which tend to trade at a premium to 1 year securities and generates additional return for the Fund. As a result, our weighted average life (WAL) has moved out slightly, although the Fund’s weighted average maturity (WAM) remains anchored at 70 days.
The Fund is currently biased towards short-dated fixed and floating rate bonds, although we always maintain an appropriate diversification of assets. In addition, 100% of the portfolio is rated between AAA and A, in accordance with its mandate.* For the Fund’s current asset allocation, please see below:
Source: Canada Life Investments, as at 30/06/18. Cash includes unsettled trades.
It is also important to note, that we do not just manage money according to today’s requirements, we actively plan ahead. For example, we are aware that a number of banks are reluctant to hold overnight deposits through year-end. Therefore, we have recently been adding a number of certificates of deposit (CD) and commercial paper (CP) positions that will help the Fund meet its overnight liquidity requirements come 31 December 2018.
Within the current uncertain environment, we believe institutions are hunting for secure vehicles for their cash deposits. At Canada Life Investments, we have a significant credit research team and a long heritage in fixed income investing that focuses on strong credits, diversification and capital protection. Within cash, liquidity and short bond mandates, we currently manage approximately £5 billion in assets.
We believe this experience and resource leaves us well positioned to navigate the current rising rate environment, something not witnessed by many investors for ten years. It has also enabled us to construct a diversified portfolio – some examples of which are included below – of attractively valued assets, with the LF Canlife Sterling Liquidity Fund currently delivering a gross money market yield (MMY) of 0.71% (as at 23/07/18).
Source: Canada Life Investments, as at 30/06/18.
*Credit ratings are internal and assigned by Canada Life Investments. Ratings will generally be in line with the major external rating agencies and should not be higher than the highest rating of these. Canada Life Investments will assign ratings to bonds that do not have an external rating.
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 may fluctuate.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail 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 should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views 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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CLI01265 Expiry 20 June 2019