When is the return worth the risk?

 

Increased volatility is being witnessed across all asset classes, but a key question to ask is what level of risk is it worth taking to achieve a range of desired outcomes in these unchartered seas? At Canada Life Investments, our sterling short-dated credit fund has a focus on providing superior risk-adjusted returns. This objective is quantified by providing investors with a sustainable income and limiting capital volatility.

This becomes particularly important in stressed market environments. Whilst the LF Canlife Short Duration Corporate Bond Fund typically lags its peers and benchmark in bull markets from an absolute performance perspective, we are still able to consistently outperform on a risk-adjusted basis through our focus on limiting volatility. This can be shown in the below two graphs, which highlight the performance of the Fund versus its benchmark, the iBoxx Non-Gilt 1-5 Year Index, as well as its rolling one year Sharpe ratio.

Source: Morningstar Direct, 13/03/2017 (inception of the I share class) to 27/02/2020. 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.

To put this into context, the LF Canlife Short Duration Corporate Bond Fund returned 2.9% in 2019, with an annualised volatility of just 0.6. The iBoxx Non-Gilt 1-5 Year Index returned 3.8%, but with a volatility of 1.4. The drawdown profile paints a similar picture, with the Fund’s max drawdown since inception standing at -0.6%, nearly half the benchmark’s drawdown of -1.1%.

We believe this performance profile is particularly critical for lower risk portfolios or for investors taking an income from retirement pots, as this is where drawdown risk is significantly magnified. A sustainable income can be achieved – for example the Fund currently yields 2.6%* – whilst volatility budget can be freed to be put to better use higher up the risk/return spectrum.

This is reflected in its standing in the IA £ Corporate Bond sector, as shown in the table below, where the Fund ranks at the very top of peer group for downside risk and delivering the most positive weekly returns.

   

Source: FE Analytics. Ratios are based on the C share class from 30/09/16 to 27/02/20. Bid to bid, with net income re-invested. Ranking within the IA Sterling Corporate Bond sector. 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.

With the lowest beta of its peers also, it is better protected against wider market moves. This is achieved by investing only in credits we understand, with strong fundamentals and robust balance sheets. We believe the Fund is a straightforward investment proposition, with a high quality, investment grade portfolio constructed by our well-resourced, experienced team in London. This has the potential to deliver a specific outcome for our clients, namely a sustainable income stream whilst lowering the overall volatility of their portfolios.

Source: Morningstar Direct & FE Analytics, to 27/02/20. I share class performance, bid to bid, with net income re-invested. Performance from 30/09/2016 to 13/03/2017 simulated from the C share class. 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.

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.

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.

*The Distribution Yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charges and investors may be subject to tax on distributions.

Data Source – © 2020 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.

CLI01580 Expiry 31/12/2020

ADAM CREED

ADAM CREED

Sales Director, Discretionary & Group

LF Canlife Short Duration Corporate Bond Fund

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