Market Review
The first quarter of 2025 began positively for UK investors, although some ground was lost in March. There was notable divergence between large and mid-cap indices, with the large cap index returning over 6% on a total return basis whilst the mid-cap index was down around 5% and underperformed in each month of Q1. The international nature of the large cap companies will be insulating them somewhat from the effects of the last Budget, whereas the mid-caps are more UK-focussed and therefore more dependent on the UK environment.
As with the prior quarter, the financial sector offered the largest contribution to market returns, with the banks – in particular HSBC – primarily responsible. Energy and industrial products also positively contributed as BP and Shell performed fairly well despite fears about an impending fall in the oil price. Rolls Royce and BAE were the main drivers behind industrials’ contribution, benefitting from expectations of higher defence spending in Europe. Healthcare was also a notable positive, with Glaxo and AstraZeneca making pleasing returns.
The consumer discretionary sector was the most negative contributor to market returns, primarily driven by the highly-rated online gambling company Flutter (which is not owned in the fund). Materials also detracted from market returns as most of the miners had a difficult quarter.
A general observable trend was that companies with a large exposure to the US struggled. Investor nerves became more frayed as erratic policy statements and weakening data caused fears about a US recession to build. Conversely, sentiment around exposure to Europe improved as Germany removed its debt brake with a view to increasing defence spending.
Fund Activity
The fund produced a positive return but slightly underperformed the benchmark. The largest positive contributor to relative returns was our underweight position in consumer staples, driven primarily by our underweight position in Diageo.
Our overweight position in financial services also positively contributed to relative performance as strong returns from the banking sector more than offset modest negative contributions from financial services and insurance. At a stock level, Lloyds Bank was the single largest positive contributor. Our overweight position in energy also helped relative performance.
At the negative end of the spectrum, our overweight position in materials detracted, with the packaging company Smurfit Westrock suffering from market jitters due to its exposure to the US consumer. Industrials cost the portfolio some relative performance, in part due to another strong performance from Rolls Royce, where we are underweight, which rose over 35% in Q1. Meanwhile Coats and Just Group, the other main detractors, were casualties of a very nervous market. Both companies released healthy results but nevertheless triggered what we consider to be an irrational reaction from the market.
During the quarter, we added Rolls Royce, International Consolidated Airlines (IAG) and Clarkson. IAG shares offer deep value from a company that is generating impressive cash returns in a supply-constrained market. Rolls Royce was purchased as a measure to control relative risk in the fund as it has grown to market weight of around 275bps and is a volatile stock. Clarkson is the world’s largest independent ship broker. It offers sound returns in a structurally supportive market and should benefit from a new IT platform that offers them a new avenue of growth. We sold out of Serco following the unexpected loss of a large Australian contract and the retirement of the CEO. We also reduced our holdings in BP and Shell as the possibility of a US recession appeared to be increasing and OPEC+ seemed to be reluctant to cut production to maintain the oil price.
Outlook
Investors continue to struggle to predict what the US will do with tariffs, what their effect might be, to whom and for how long. In the UK, growth forecasts have been cut and fiscal headroom reduced. This has forced the Treasury into a second ‘mini budget’ focussing on cutting government spending, therefore taking money out of the economy. Additionally, we continue to wait to see what the impact of the ‘stagflationary’ measures announced in the October budget will be.
On the other hand, real income growth continues, with a high savings rate suggesting that the UK consumer is in reasonable shape. The large corporates in which we invest are generally in fairly robust health and the UK stock market is performing well compared to the US. We will therefore continue closely to monitor the data as it comes out and react accordingly.
Important Information
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.
