Perfect time for cherry picking
When the covid-19 pandemic first struck, we had more than sufficient overnight and one week liquidity to meet the fund’s needs. With a good deal of assets maturing on a day-to-day basis through our liquidity ladder, we saw no benefit in following the herd in flooding the fund with comparatively expensive sub one-month commercial paper (CP) as a way to bolster liquidity. Instead, our focus has been more of a bar-bell approach – equally adding short liquid or government/agency pieces, whilst taking advantage of new opportunities in names that we feel very comfortable with, as the panic selling started levelling off.
One asset we had been keenly eyeing and that in our view stood out in terms of value for risk, was the ING April 2021 bond. This multinational banking and financial services corporation based in Amsterdam is split-rated, Aa3, A+ AA-, whilst our internal credit research team conservatively rate it A+. We bought it in late March after it had cheapened to 185 bps over gilts, grabbing 1.90% yield for one year in an A+ senior preferred bond.
Sector-wise, in this current environment we favour selective financials over corporates, particularly as banks are better capitalised and have much stronger balance sheets than they did when the global financial crisis erupted in 2008. This is largely due to enhanced regulations, proposed by the Bank for International Settlements’ Basel Committee following the crisis, which have significantly improved capital requirements and liquidity standards for banks over the past decade.
More important than ever in our decision-making process are the consultations with our internal credit analysts as well as the wider fixed income fund management team. Although social distancing means we are no longer in meeting rooms and these conversations take place via conference calls and videos, they have been vital in our current asset selection and counterparty risk monitoring.
In this respect, we have been busy seeking and adding assets with comparative value where we see fit and eyeing interesting bonds in the bank space provided that they are not clinging to a rating or, from our own assessments, look like they could potentially unbalance the fund. On the 1st of April 2020, we added £1m of the Coventry Building Society May 2020 bond at 2.35% rather than, for example, going with Credit Mutual commercial paper which was selling at 0.70% - both assets maturing on the 5th of May, with similar ratings.
In terms of new purchases, where Rabobank were selling their own January 2021 commercial paper at 0.45%, we instead chose to add Wells Fargo January 2021 commercial paper at 1.81%. Not only does it provide counterparty diversification and a new date on our maturity ladder, but it also gives us a yield pick-up of 1.36%.
These levels have left the market and the above opportunities have become rarities rather than the norm following the unprecedented intervention to provide support to markets and communities alike by the central banks.
Nonetheless, it is not only through buying bank bonds and paper that we have added comparative value. In seeking highly liquid AAA rated assets as an alternative to UK T-bills or Gilts, we have added June 2020 KfW at 25bps over T-Bill levels and March 2021 EIB at 40bps over the January 2021 Gilt, adding more sovereign, supranational and agency bonds (SSAs) bonds to the fund because they have proved to be more resilient in terms of pricing compared with other issuers since the crisis started.
The seeking of yield for the fund has not meant dropping our high stndards of quality. Whilst adding SSAs and covered bonds at the AAA end of ratings, we have also been actively reviewing counterparties at risk of downgrade. Here, we have reduced term limts to new asets for Nationwide and Toyota, whilst removing BMW and Honda from our approved list for new assets, anticipating downgrades for these names at their next review.
So, through its conservative yet active nature, the LF Canlife Sterling Liquidity Fund has continued to manage flows and soak up one-off value opportunities despite covid-19 and its profound effect on the markets. As the uncertainty around the lockdowns and containment of the virus continues, we also have taken the opportunity to favourably position and cater the fund for a range of both positive and negative future scenarios. Holding an increased amount of money in overnight access, for example, protects the fund against a second wave of infection by providing us a reliable source of liquidity when immediately required.
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. 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.
CLI01599 Expiry 31/03/2021