Quality is key in today's uncertain climate


Ringing in the New Year can take on a meaning of its own when it comes to investing for retirement. Launched on the 1st  of July 2019 with the aim to provide a steady monthly income for investors, the LF Canlife Diversified Monthly Income Fund is celebrating its first January and has reason to since, despite increased volatility of late, it continues to deliver what it was designed to do.   

Income funds, in general, make good sense for drawdown, mostly because the fund managers’ focus is targeting what the client wants: income. This focus calls for the managers to produce a level of income more aligned with the client’s expectations and indeed to do that well into the future. However, given the current uncertain climate and late stage of the cycle, there are things that advisers must consider in terms of what may or may not suit their clients’ needs.

2019 presented a lot of firsts: at least £12 trillion of debt was still paying negative yield by the start of December and bond yields remained low because of the shift back to quantitative easing (QE) by central banks. More unusual was that spreads in Europe became lower than in the US last year even though by virtually all measures the forecasts for the European economy were worse than those for the US. Another surprise example was when the 10-year Greek government bond yield dipped below that of the US 10-year Treasury note even though Greece has a significantly lower credit rating, much higher unemployment and a more depressed economic outlook.

Historically speaking, most income producing funds would invest in fixed income for their lower risk allocation. In previous cycles, they would turn towards government bonds but, given QE, they no longer offer as attractive yields. Now, with very low yielding debt, investors are being forced to take on more credit risk by investing in corporate bonds. Income fund managers trying to deliver an income in excess of 4% inevitably would need to look further down the ratings spectrum in order to find greater yield.

Currently, around 45% of fixed income holdings of income funds* sit within either high yield or non-rated. That’s a record percentage. The average allocations for monthly income funds are currently around 40% in equities and 40% in bonds. Today, due to the weighting of high yield within fixed income, clients could be holding a portfolio where more than half the underlying investments act more like equities than fixed income. Therefore, it is important in the current climate to understand how much equity-like risk is in the portfolio.  

Source: Morningstar, as at 30/11/19. Assumed annual yield of 4

Important information

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.

* Source: Canada Life Investments, data obtained from Morningstar as at the 30th September 2019, based on all monthly paying income funds within the IA Mixed Investment 20%-60% Shares sector.

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.

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.

CLI01543 Expiry 31/12/2020

In the last few years, we have seen volatility of the largest monthly income funds increase by around 50%. While this is expected, given the underlying holdings, the monthly dividend payments have also become more volatile. The bar chart below shows the average monthly dividends being paid by peer groups.

With the LF Canlife Diversified Monthly Income Fund, 82% of the fixed income holdings is in investment grade bonds and although 59% is in BBB rated bonds, our strategy has remained focused on delivering consistent monthly yields without venturing out of our comfort zone in terms of risk. Low risk is at the core of all our strategies and our internal credit research team plays an integral part in allowing our managers to select high quality credits across the investment grade spectrum. By undertaking fundamental credit analysis and identifying companies with attractive spreads – but with strong balance sheets that can withstand an economic downturn – we are able to construct a portfolio that can deliver a sustainable income stream with a limited fluctuation in capital values. This internal analysis enables Craig Rippe, the Head of Multi-Asset, to keep a consistent strategy of providing investors with more certainty and better month-to-month budgeting in retirement.

Andrew Morris

Andrew Morris

Product Specialist

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