What do you see as the major market drivers over 2018/19 and how do they impact the LF Canlife Managed 0%-35% Fund?
Looking forward, the major underlying positive is that the global economy is expected to continue its synchronised economic recovery, with 3.7% Gross Domestic Product (GDP) growth forecast for 2018. However, this strength means that, after a decade of ultra-loose monetary policy, some monetary tightening is to be expected. And we have already seen interest hikes from the US Federal Reserve, the Bank of Canada and the Bank of England. This could put pressure on government bond prices, although we are more optimistic on the outlook for corporate credit. Alongside the positive economic outlook, issuance remains healthy and default rates are low. We do, however, maintain a short duration bias within the Fund, to protect capital against interest rate rises.
In the UK, the outlook for the domestic economy is more uncertain due to the Brexit overhang, with consensus 2018 GDP estimates coming in at 1.4%. However, many investors forget that over 70% of the UK equity market’s revenues in fact come from overseas. Therefore, the positive outlook for the global economy largely translates to a positive one for many UK companies, particularly those which have significant overseas earnings.
The commercial property market also continues to perform well despite Brexit headwinds with capital values remaining steady. Sterling has made UK-based assets more attractive for foreign investors while rental yields have remained attractive, with property representing some of the highest yielding assets in the market. At Canada Life Investments, our focus remains on identifying quality assets on attractive yields and properties where we believe we can add value through active management initiatives.
How has the Fund performed since its launch at the start of 2017?
The strategy has been in existence in the life and pensions space for more than 14 years and, given its long-term track record of outperformance, we decided to launch an OEIC version to broaden its appeal to investors. The Fund’s focus on high quality, UK income-generating assets and maintaining a diversified, conservative investment style has ensured a consistency of performance, with the track record of the life and pensions vehicles being achieved through a variety of economic conditions, including the financial crisis in 2008 and subsequent recovery. Since its launch on the 31 January 2017, the LF Canlife Managed 0%-35% Fund has returned 5.6%, versus the IA Mixed Investment 0-35% Shares sector average return of 5.0%.*
Source: Morningstar Direct, as at 31/12/17. Bid to bid, with net income re-invested for the C share class. Past performance is not a guide to future performance.
What are the risks to the Fund if interest rates rise?
The primary risk surrounding interest rate rises is that it causes the price of fixed income securities to fall. The sensitivity of an individual security’s price to interest rates is dependent upon its maturity. For example, the price of a bond that matures in 10 years will fall by more than one which matures in three years.
At Canada Life Investments, we believe that interest rates will rise modestly in 2018 and we have positioned the Fund accordingly. Approximately a third of the portfolio is invested in the LF Canlife Short Duration Corporate Bond Fund, which is designed to preserve capital when interest rates rise, as well as providing a sustainable income through investing in higher yielding corporate bonds. Therefore, we believe that the risks to the Fund are limited.
We have been in an extended bull market, particularly in equities, in recent years. Is there a risk of a correction?
We forecast a background of solid global economic growth and relatively subdued inflation, which is not a typical backdrop for a significant correction in equities. However, we are starting to see signs of exuberance in some areas of the economy. Bitcoin is a prime example but it is also prevalent in the art world where the Salvator Mundi was sold for a record $450m. The hunt for yield by investors in recent years has also pushed investors into more risky areas of the market. For example, European high yield bonds now yield less than 10-year US treasuries, whilst Argentina has issued a 100-year bond, with an effective yield of 8%, despite their history of defaulting on debt repayments.
Can the Fund gain exposure to the global economic recovery, despite investing only in UK assets?
The UK is a diversified, internationally-focused market and is far from a play on purely domestic themes. Over 70% of the revenues generated by listed UK businesses come from overseas, which also means they benefit when domestic issues cause sterling to weaken. This enables UK investors to gain exposure to a wide variety of global growth themes. For example, the Fund currently has 26% invested in UK equities, with positions in companies such as BBA Aviation, via the LF Canlife UK Equity Income Fund. BBA provides aviation support and aftermarket services to business and private jets and the vast majority of its earnings come from North America.
We are also able to gain global exposure via our fixed income and property allocations. This is because global companies frequently issue bonds in sterling, and our bond portfolios have a broad range of bonds issued by international companies including Apple and AXA. London property also remains a ‘trophy asset’ for many overseas buyers and we continue to see buyers from China, Germany, the Middle East and the US supporting the market.
What are the benefits of investing in in-house funds?
By investing primarily in our own range of actively managed funds, we are able to tap the vast expertise of our in-house fund management teams and their long-term track records in their individual asset classes. This allows me to focus on wider asset allocation decisions, whilst leaving the stock-picking decision to the managers who are experts in their individual markets. Importantly, this also allows us keep the product cost down and enables me to receive regular updates on the construction and activity within each in-house fund.
What are the benefits of the Fund being risk profiled, as opposed to risk-target managed?
A number of products at Canada Life Investments are risk-target managed, which enable the portfolios to be consistently matched to the risk tolerance of our underlying clients. However, when compared to the risk-profiled LF Canlife Managed 0%-35% Fund, they do lack some flexibility in allocation. Therefore, in this Fund we are able to alter our equity and fixed income weightings, dependent on our market views, but of course within the boundaries of the IA Mixed Investment 0-35% Shares sector. This also allows us to react to market events in times of market stress for example, to protect capital.
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. Some Canada Life Investments funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
Data Source – © 2018 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.
The Canada Life Investments blog page features images licensed from Getty Images International. These images shall not be downloaded, republished, retransmitted, reproduced or otherwise used in any way. Aside from the above, and unless otherwise stated, Canada Life retains copyright in and/or has a right to use all contents of this website (including text and graphics) and such contents shall not be copied, distributed, extracted or modified without the express prior written consent of Canada Life unless for private, non-commercial use.
CLI01063 Expiry 9 January 2019