Steve Matthews, fund manager, LF Canlife Sterling Liquidity Fund; LF Canlife Sterling Short-Term Bond Fund talks about his approach
How would you sum up your investment approach in 100 words or fewer?
We look to ensure liquidity via overnight deposits and covered bonds, and invest in government/agency assets for financial strength. We pick up yield where possible in high-quality counterparties, diversifying across around 70 counterparties. We work closely with the bond team to find assets that might otherwise be missed – one recent example was secured bonds issued by Anglian Water.
We're not constricted to sectors or asset types, so we are able to consider all appropriate assets on a risk/return basis. We seek out yield but always consider the security, quality and liquidity of potential investments.
What is your current favourite investment play (over the time horizon of your choice)?
I like to buy 2-year covered floating rate notes (FRNs), preferably new issuances, where the current split of the fund allows. This can provide a 40 bp yield pick-up on 1-year FRNs, thereby generating material outperformance over its life. I also like to add covered FRNs as they fall into the two-year maturity bucket as these again provide substantial spread pick-up without taking risk on future interest rate movements.
Cash or gilts?
For us, cash is king. Gilts and T-Bills have their part to play in money market funds as they provide high levels of liquidity and from time to time their yields exceed commercial paper and certificates of deposit. However, my preference is to manage the potential impact of any outflows on the balance of the fund through holding outsized overnight deposits. This allows for the easiest accessibility to liquidity at consistent SONIA levels.
What do you view as the biggest current investment risk?
This is difficult to choose as we move on from the collapses of Silicon Valley Bank, Credit Suisse et al. Clearly, high interest rates will have an increasing impact on finances and possibly bank profitability and stability. However, the banks we use are national champions and closely monitored in a way that meant that we held no exposure to CS long before its failure. New counterparties come to the market from time to time. We never invest in any new names without full engagement with our credit analysis team.
What do you exclude on ESG grounds and why?
To a large extent this is a moot point; most of the counterparties that we exclude on the basis of environmental concerns would not in any case have high enough ratings to qualify for our ESG negative screening. For those that do some, such as Equinor, BP, Total have been removed until such a time that their green credentials improve.
We may also exclude for governance and social issues. Credit Suisse and Danske were removed from the portfolio for poor governance and anti-money laundering concerns in the past.
Which investor/economic thinker do you most admire and why?
I don’t follow any one particular school of thought; markets and economies evolve over time and investors, managers and economists may not get everything right all the time and opinions may become outdated. I like to research far and wide using many publications and news feeds in order to get a holistic view of markets and economies.
What is the best advice you’ve ever been given?
Add a couple of wickets and see what it looks like then. I see this as an analogy for liquidity in investments - most assets look good at the point of purchase and appear liquid, but things can change quickly - will you be able to sell it in extreme market conditions?
Disclaimer
The value of investments may fall as well as rise and investors may not get back the amount invested
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.
No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.
The LF Canlife Sterling Liquidity 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.
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Canada Life Asset Management 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 Limited 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.
Promotion approved 06/07/23