Up until the covid-19 outbreak, the UK was in reasonable shape with low unemployment and improving real wages lead by a strong government willing and able to add fiscal stimulus to the economy. That became largely irrelevant when the virus hit the UK. At the time of writing, the UK market had fallen more than 34% almost in a straight line from the 20th of February to its current trough with all sectors participating in the falls. It then bounced some 16% within three days. Individual stocks moving down and sometimes back up in double digits within a single day has temporarily become the norm.
Update from Stuart Taylor, Senior Co-Manager of the LF Canlife UK Equity Income Fund
An underweight position in property and overweight positions in mining and utilities have helped the relative performance of the fund while positions in industrials and consumer staples have contributed negatively. Nevertheless, this recent period of market dislocation has thrown up opportunities as well as highlighted risks.
The economic effect of the virus is yet to be fully understood but as it spreads in the West, the recovery in the East, primarily China, is beginning so companies, such as miners BHP and Rio Rinto, have been up-weighted. These companies are also, helpfully, financially secure and able to support attractive dividend yields. The manager plans to broadly follow this pattern from East to West, however, cognisant that the US leadership appears to still be in denial about the seriousness of the virus.
More UK focussed names where the manager believes dividends can be maintained, such as food retailers, utilities and selected financial companies, have also been up-weighted. UK Banks are now priced very attractively but are unlikely to come through the next 12 months unscathed. Therefore, dividends cuts are expected. They remain well capitalised and with a medium-term investment horizon offer attractive return prospects.
Unrelated to the coronavirus, the oil market is also suffering extreme dislocation so the fund has just a modest exposure. Royal Dutch Shell hasn’t cut its dividend since 1945 and will work very hard to defend it but it is currently far from clear that they will be successful. The next OPEC meeting in June may be a key turning point, or not.
In summary, the income fund is set up well to participate in a strong market rally whilst looking to mitigate the effects of further market falls whilst offering an above market yield. Longer term opportunities are being balanced, as always, with an eye on short-term risks, volatility and liquidity.
Update from Nigel Kennett, Manager of the LF Canlife UK Equity Fund
The areas most affected by the coronavirus outbreak have been the higher growth and pro-cyclical sectors of the UK market, while the defensive sectors have performed relatively well. With the UK Equity Fund's bias to growth, its positions in the media, general retailing, capital goods and transportation sectors have been the most impacted during this highly volatile period.
However, since the fund is managed as a diversified portfolio, its overweight positions in utilities, information technology, and food retailing have helped performance. The fund's long standing fundamental underweight stance on the oil sector has also had a positive contribution considering oil prices have been under significant pressure due to increased supply and intensified concerns over the near-term outlook for the global economy. As such, we decided to further underweight the oil sector with a reduction in our BP holdings.
Nevertheless, this period of extreme volatility in UK equities has also presented opportunities for longer term gains. With valuations in some cases having dropped to levels not seen since the 2008 global financial crisis, we have taken the opportunity to selectively add to positions in the shares of companies we believe to be long-term winners in their industries. This has included Diageo, Coca-Cola Hellenic Bottling Company, JD Sports and Aveva, the British multi-national information technology company based in Cambridgeshire.
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 of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
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.
CLI01595 Expiry 31/03/2021