The LF Canlife Sterling Liquidity Fund is designed to provide institutional investors with a high degree of capital security and daily liquidity with the ultimate aim of delivering enhanced returns relative to short-term bank deposits. It stands out within Canada Life Investments’ well-rounded product range because of its day-to-day active management strategies.
Every day counts
We constantly look at how we can exploit market inefficiencies, but as the Brexit clock ticks, the need to protect against increased volatility and uncertain market risks becomes even more crucial. As such, because 3-month and 6-month Libor have been dropping towards overnight levels and therefore squeezing returns, there is no value going beyond six month maturities unless they are specific bonds we have selected because of conviction.
To put this into context, we recently bought two ANZ floating rate notes (FRNs) at 37bps over Libor which added significant value. Bought at 45bps over money market funds, these FRN investments allowed us to enhance returns while we focused on increasing liquidity by adding shorter-term maturities given the Brexit effect, with 17.5% of the Fund currently invested in overnight term deposits and money market funds. We have also increased gilts and T-bills since they are paying the same yield as A+ rated 3-month term deposits and 3-month Certificate of Deposits (CDs).
This small barbell strategy is only part of the bigger picture though. As a cash fund, we normally hold to maturity but if we are ever concerned about a risk or sudden correction that could potentially affect our performance curve, we may take profit and avoid unfavourable bumps. For example, in February, we bought a Santander bond initially at yield to maturity of 1.80%, averaging 1.65% as we added to our holding. When the yield fell to 1.25% in just two months, we felt it had significantly outperformed its peers and opted to sell to protect the gains we had achieved.
3-month and 6-month Libor falling versus Sonia
Credit where credit is due
Depending on the different maturities of our holdings, we potentially make a handful of trades on a given day, staying focused on well-thought out diversification and market risk management. We look assiduously when it comes to adding on to any of the top 15 holdings and collaborate closely with our internal credit analysts, meeting with them regularly to assess our holdings. We also actively position ourselves so as to avoid potential problematic credits. For example, when our internal credit research team alerted us to some red flags they saw at BASF we thought carefully about their concerns and decided to remove it from our counterparty list even though external rating agencies had not yet downgraded it. Another example of our high-conviction strategy is the Scandinavian banks and their recent woes. We had small positions in A rated Danske Bank prior to the investigations of its money laundering scandal but won’t invest again until we are satisfied with their governance. Although we remain cautious about Swedbank, it started from a better rating of AA- and we have limited holdings to a term consistent with an A+ rating in anticipation of a potential downgrade.
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. This fund is a UCITS scheme and a standard variable net asset value (VNAV) money market fund (MMF). The MMF is not a guaranteed investment, nor does it receive external support to guarantee its liquidity. Unlike bank deposits, investment in MMFs can fluctuate and investors’ capital is at risk.
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.
CLI01415 Expiry on 30/06/2019