Regardless of asset class, a common request from investors looking for income-generating funds is the ability to produce a sustainable income with a low volatility profile. An area we believe can deliver this is short duration investment grade credit. By undertaking fundamental credit analysis and identifying companies with attractive spreads – but with ironclad balance sheets that can withstand any downturn – we are able to construct a portfolio that can deliver a sustainable income stream with limited fluctuation in capital values.
The LF Canlife Short Duration Corporate Bond Fund was launched in September 2016 to cater for this need and celebrated its three year anniversary on the 30/09/2019. Pleasingly, it achieved this milestone as the Fund with the lowest volatility in the entire IA Sterling Corporate Bond sector, at just 0.65%. Of course the sector contains many different styles of portfolios, but the fact that the LF Canlife Short Duration Corporate Bond Fund was the absolute least volatile speaks for itself, as well as showing it up very well versus its specific short duration peers.
For example, the below graph plots the annualised income yield and volatility of the Fund compared to its direct peers that invest in short duration investment grade credit. Only one peer has a higher annualised income yield, but it has near twice the volatility.
Source: Morningstar Direct & FE Analytics, as at 30.09.19. The peers compared against are those in the IA Sterling Corporate Bond sector that invest in short duration investment grade corporate bonds. Annualised income yield based on income earned from a £10,000 investment over the last three years from the primary income share class. Volatility measured using weekly data points over the last three years, annualised.
Of course capital return has to be taken into account alongside paid out income and – in 2019 – the LF Canlife Short Duration Corporate Bond Fund has lagged other short duration funds from a total return context, because of the sharp rally we have seen in ‘risk-on’ assets year-to-date. Given our annuity background and heritage, we take a conservative view within our fixed income portfolios, with a significant bias towards capital protection.
We would also point out that the rally in credit markets this year has been technical, not fundamental. In a more historically normal market environment, as government bond yields rise credit spreads tighten, reflecting a healthy, growing economy. The opposite is also true, as gilt yields fall – reflecting a ‘risk-off’ environment – credit spreads widen. However, that has not been the case in 2019 as gilt yields have fallen and spreads have tightened, resulting in all fixed income assets outperforming.
Source: Markit, as at 30/09/2019
We are therefore more cautious on the outlook and believe the capital protection bias of the Fund, as well as its sustainable income stream, leave it well-placed as a core holding within defensive multi-asset portfolios. In a world where investors are increasingly taking on extra risk to achieve a higher yield – a strategy that could suffer as markets become increasingly volatile – we believe focusing on short duration, high quality investment grade assets, underpinned by fundamental credit analysis, provides a compelling alternative.
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 on the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
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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.
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