As is often the case, markets were active over the summer period, with UK equities giving up July’s gains during August to end the quarter modestly up. Positive returns were led by a recovery in commodities, particularly by oil and mining companies, as Saudi Arabia and Russia further restricted oil supply.
At a macro level, UK CPI fell from 9.4% at the beginning of the quarter to 6.7% in August’s release. This led the Bank of England to hold rates and encouraged markets to contemplate the possibility that we are close to peak rates, with cuts on the horizon. This scenario is at odds with higher commodity prices, which are clearly inflationary, posing a conundrum to investors.
Over the quarter the fund generated a positive return and outperformed its benchmark. The fund remained positioned for UK consumer resilience and to benefit from the expectations of a severe recession to soften. We also expected wage growth to remain strong and to begin to rise in real terms as inflation abated. However, we trimmed exposure to the housing market in anticipation of a lacklustre selling season and transaction volumes.
The fund’s relative performance benefitted from sector overweights in financials, energy and materials. At a stock level, the largest positive contributor was the overweight to financial firm Burford Capital, which benefitted from a favourable judgement in its case against Argentina.
The largest detractor at a sector level was utilities, largely led by weakness in our Drax holding as the company’s UK biomass strategy garnered a lot of market attention despite its relative low importance to the wider group. The next largest relative detractor in sector terms was consumer discretionary. This was down to holdings in Entain, which had a modestly disappointing trading update, and Redde Northgate, which fell victim to investors’ fear about a recession – despite healthy fundamentals.
There were no major changes to the positioning of the fund during this time and it remained set at reasonably low levels of risk as we awaited some higher-conviction opportunities. We reduced exposure to Shell as we breached the 10% maximum holding limit and swapped some of this capital into BP. There were no additions or exits during the quarter.
Our view, that the risk of a recession in the UK is much lower than the general consensus, remains unchanged. We continue to think that inflation will remain stickier than expected, though this should still reduce from current levels, with accelerating wage growth ameliorating the pain inflicted on the consumer. UK corporates still seem to be performing reasonably well and the banks are reporting remarkably few signs of stress across their loan books. The slow housing market is clearly a drag on the economy but should begin to normalise as people get used to a higher interest rate environment and/or rates reduce over time.
The combination of low valuations in certain quarters of the UK, and the prospect of some economic pressures easing in the coming months, means the fund’s risk metrics could rise as opportunities are pursued. Any changes to the fund’s risk makeup will be carried out in a data-dependent and measured way.
The value of investments may fall as well as rise and investors may not get back the amount invested.
Due to the underlying assets held in the WS Canlife UK Equity Income Fund, the price of the fund is classed as having above average to high volatility.
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 Asset Management. 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 in the literature section.
Promotion approved 18/10/23