Canada Life’s Chief Investment Officer David Marchant takes a close look at the key market drivers for 2018, future interest rate rates, whether the bull market is coming to an end…and how all this impacts on our popular Canlife Managed (0%-35% Shares) Fund.
- What do you see as the major market drivers over 2018, and how do they impact on this 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 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 Canlife Managed (0%-35% Shares) 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 80% 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 high, resulting in property assets representing some of the highest yielding assets in the market. At Canada Life Investments, our focus remains on identifying undervalued assets on attractive yields, such as smaller industrial units in key strategic cities.
- How has the Canlife Managed (0%-35% Shares) Fund performed since its launch 15 years ago?
Since its launch in February 2003, the Fund has returned 133.8%, which has been achieved with low volatility and a consistent performance profile. In comparison, the ABI Mixed Investment 0%-35% Shares sector average return has been 92.0%. The Fund’s focus on high quality, UK income-generating assets and maintaining a diversified, conservative investment style has ensured a consistency of performance. Its track record has been achieved through a variety of economic conditions, including the financial crisis in 2008 and subsequent recovery.
- Why is this Fund good for retirement?
The Canlife Managed (0%-35% Shares) Fund has a strong track record of delivering capital growth with low volatility, utilising a straightforward investment approach and simple portfolio construction. The Fund is diversified across asset classes and is focused on sterling-based, income producing assets, thereby reducing the impact of currency volatility. We believe this suits investors who are in or nearing retirement, as capital protection and low volatility are incredibly important when retirees are drawing down on investments. The Fund’s low charges also benefit investors by preserving returns, with an OCF of just 0.11%.
- 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 Canlife Managed (0%-35% Shares) Fund accordingly. Approximately a third of the portfolio is invested in the 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 da Vinci’s painting 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. 80% 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 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 incorporate 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 to keep the product cost down and enables me to receive daily 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 Canlife Managed (0%-35% Shares) Fund, they do lack some flexibility in allocation. Therefore, in this Fund we are able to significantly alter our equity and fixed income weightings, dependent on our market views. This also allows us to react to market events in times of market stress for example, to protect capital.
- Finally, why is it called the Canlife Managed (0% - 35%) Fund?
The fund sits within the ABI Mixed Investment 0-35% Shares sector, in which funds are allowed to have up to 35% of their portfolio invested in equities, with a minimum of 45% in investment grade fixed income and/or cash.
Other assets are also allowed to be held as long as these requirements are met. For example, 57% of the Canlife Managed (0% - 35%) Shares Fund is invested in cash and fixed income, 26% in UK equities and 17% in property.