It is uncertain when the current economic cycle will come to a halt, but what is certain is that we are undeniably approaching full time. This has put pressure on investors, who are shying away from ‘traditional’ fixed income assets – such as investment grade corporate bonds – in favour of alternative-style absolute return bond funds and more strategic, esoteric offerings.
However, as active fund managers with a comprehensive, internal credit analysis and research capability, we believe that there is still significant value to be found in the IG corporate space and that it can still be realised at this point in the cycle. For example, the LF Canlife Corporate Bond Fund, launched in July 1981, has delivered average 5 year annualised returns of 7.2% across 396 data points. Importantly, no 5 year period saw a negative return, with the lowest – from the 30 June 2003 to the 30 June 2008 – still delivering an annualised 1.5% return during a period of whipsaw market volatility.
Source: Morningstar Direct, as at 31/05/19. C Acc share class performance, in sterling. Bid to bid, with net income re-invested. Past performance is not a guide to future performance.
Of course, when looking at the last decade, much of the market’s discussion has been centred on quantitative easing (QE) driving fixed income returns. Whilst this is true – investors have not been rewarded for sector and stock selection for some time – we believe that fundamental credit analysis will regain its importance in driving future performance. This is particularly crucial this late in the cycle and even more so with the BBB-rated space now making up more than half of the IG universe. The growing number of BBBs is largely attributed to how QE and an unusually long period of low interest rates have made it easier and cheaper for companies to finance their businesses. Concerns about the amount of leverage this adds to the financial system have also put these credits into the limelight.
The last time a crisis hit in 2008, the IG market, in general, sold off sharply quite simply because the passive market does not analyse credits in the same way. In contrast, our focus on fundamentally strong credits, capable of weathering economic storms, saw the LF Canlife Corporate Bond Fund outperform significantly.
Source: Morningstar Direct, 31.12.07 to 31.12.08. C Acc share class performance, in sterling. Bid to bid, with net income re-invested. Past performance is not a guide to future performance.
However, that is not to say that we are hiding in the AAA market as we approach the final whistle, quite the contrary. We believe that maintaining some exposure to selective BBBs makes sense, particularly given the superior income and return prospects of some. We look at the individual companies rigorously in terms of value and the ability to weather economic changes or interest rate moves. We are also concerned about the amount of debt as a whole in the financial system and assess companies’ leverage and cash-flows as well as their sectors and market share within them.
For example, we recently purchased a Fidelity National Information Services (FIS) BBB-rated bond for the LF Canlife Corporate Bond Fund.* The company boasts substantial scale and revenue diversity, with a healthy annual free cashflow of $1.4 billion. Although leverage has been increased by its recent purchase of Worldpay, FIS has strong track record of deleveraging post acquisition.
This is indicative of our focus on robust and independent analysis forming the cornerstone to investing in credit. When we do get a downturn, there is likely to be considerable divergence in returns within the increasingly large BBB bracket of the bond market. Therefore, we will continue to be selective and look for situations that meet our rigorous criteria.
Source: Morningstar Direct, as at 31.05.19 & 31.03.19, in pound sterling. C Acc share class performance, bid to bid, with net income re-invested. Past performance is not a guide to future performance.
*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 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. Currency fluctuations can also affect performance.
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 on the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
Data Source – © 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
CLI01445 Expiry 31/05/2020