Fund management is ultimately about balancing risk and return within the relevant asset class to deliver value for your investors. As a result, it is optimal to be able to leverage different sources of return – and thus balance risk – within a portfolio. This ensures the fund manager is not overly reliant on one single factor. A prime example of this at Canada Life Investments lies within our LF Canlife Global Macro Bond Fund, which invests in high-quality, developed market, investment grade and sovereign bonds.
The managers employ a ‘triptych’ approach within their investment process in seeking to use three sources of return. These are duration (whether interest rates and bond yields are rising or falling), credit spreads (buying corporate or government bonds and how far that is down the credit spectrum) and lastly currency (seeking to be overweight in bonds denominated in currencies that we believe will strengthen versus sterling and vice versa). The theory behind this process is that it is unlikely that all three sources will positively contribute to performance at the same time. Indeed, since inception there has never been a calendar year in which this has happened.
Instead, we believe this approach enables the Fund to perform throughout the cycle with at least one source positively contributing. For example, when rates are rising you will typically lose money on the duration aspect, but gain on the currency allocation. This is neatly highlighted in the below table, which looks at calendar year performance and the underlying drivers. For example, most recently in 2018, global yields went up – a negative for fixed income funds – hence the red arrow. Global credit spreads also widened, therefore another negative. However, our overweight in bonds denominated in foreign currencies – particularly the US dollar – enabled the Fund to still generate a positive return.
Diversified sources of portfolio return
Source: Morningstar Direct & Canada Life Investments research. C Acc share class performance, bid to bid, with new income re-invested. Duration contribution shows the change in 10-year US, UK & German government bond yields, credit spreads the change in the iBoxx USD Corporates Index and FX the change in trade-weighted GBP.
We believe this active approach is becoming more crucial given the way central bank policies have distorted the global fixed income market in recent years. Although this central bank support has been extended this year it cannot continue forever. Therefore, active management and fundamental credit analysis – always a focus of ours at Canada Life Investments – will once again prove essential. No more can fund managers simply buy higher beta bonds and expect to outperform as the biggest buyer starts to exit the market.
We continue to focus our efforts on the strongest names within sectors that we believe have been unfairly punished. For example, some European insurance names suffered in the fourth quarter of 2018 purely because insurance bonds were used as a risk proxy and disproportionately sold off. However, the sector remains home to a number of world-class businesses with strong balance sheets that are currently trading at particularly attractive levels.
Source: Morningstar Direct, as at 31.03.19, in sterling. C Acc share class performance, bid to bid, with net income re-invested.
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.
CLI01417 Expiry 30/06/19