Five years of the LF Canlife Sterling Liquidity Fund

Five years of the LF Canlife Sterling Liquidity Fund

Stability in all circumstances

Five years ago, with interest rates at historic lows, we decided to offer institutional and discretionary investors a Fund focusing on capital preservation that would generate a return on their short-term deposits. Drawing on our considerable experience in managing liquidity assets and deep knowledge of the credit market, our main objectives were to provide investors with a high degree of capital security, liquidity and stability. We also wanted to deliver an attractive yield, but without compromising our commitment to liquidity and risk management.

Providing stability through safety-first

Launched a year after the Brexit referendum, and into a lower-for-longer interest rate environment, followed by the Covid-19 pandemic, the Fund has had to negotiate considerable economic uncertainty from the outset. However, we believe that it has demonstrated that it is well-equipped to adapt to a range of market environments, producing attractive returns without watering down our safety-first investment philosophy. Since inception, the Fund has closely tracked the sterling overnight rate, returning 1.95% to closely match SONIA, which returned 1.93%.[1]

Consistency is a hallmark of our approach. Underlying the five-year track record of the LF Canlife Sterling Liquidity Fund is our 20 years’ experience managing very similar mandates through a number of market cycles. Originally launched with £140m of Canada Life International Deposit Fund money, the Fund has grown to £670m [2]

For our external clients, this provides the stability of investing alongside a life company – a natural long-term holder of cash – together with a well-diversified pool of fellow cash investors.

For our external clients, this provides the stability of investing alongside a life company together with a well-diversified pool of fellow cash investors.

 

Navigating all environments

We are pleased to be able to say that the Fund has calmly navigated all environments; it provided security and liquidity for investors through the extended low interest rate environment, including the spectre of negative interest rates, and continues to do so now, when other asset types are more volatile. We consider that the Fund is there to provide stability in all circumstances and believe that to a great extent it has done that.

We pay close attention to portfolio construction, assembling a blend of money market assets, with maturities ranging from one day to 24 months, that each contribute to the Fund’s objectives in different ways. Always high quality, with a rating of between AAA and A at the time of purchase, these include overnight deposits, gilts and T-bills, certificates of deposit (CDs), commercial paper (CP), floating rate notes (FRNs) and short-dated bonds. Each of these plays a part in ensuring that we have a constant flow of liquidity, yield and relative price stability.

For example:                                                                                                         

  1. Overnight deposits to provide T+1 liquidity
  2. Short-dated corporate bonds to provide yield
  3. Two-year FRNs to provide price stability (where rapid market movements occur in anticipation of rate hikes, the prices of 2-year FRNs move in line with market expectations for the next rate change only, rather than for a longer time horizon)

Diversification is, of course, also paramount in controlling portfolio risk exposures. Since launch we have maintained an approved counterparty list comprising over 140 names, from which we have had an evolving cohort of approximately 70 names within the Fund at any one time. At the same time, the number of holdings in the Fund has consistently been above 130. Collectively, our counterparties have an average long-term rating of low AA to high AA-.[3]

In order for a name to be included in our counterparty list, we must be satisfied that they have strong fundamentals. For individual assets, we look for an attractive valuation that is cheap in relation to both its peers and its own outlook and ratings.

The portfolio’s construction is underpinned by diligent research. We lean on the credit expertise of the in-house Credit Research Team to monitor the suitability of counterparties. The team has both breadth and depth of coverage. It covers more than 400 issuers in Europe and more than 2,000 globally, providing in-depth updates on companies and their sectors, as well as conducting annual reviews. In addition, the global research coverage of Great-West Life group allows us to draw on the experience of our US and Canadian colleagues where necessary.

Our approach in action

Flexibility in asset choice

Choosing the right instrument for the environment is crucial. In August - November 2019 we maintained a focus on UK Treasury Bills, which during this period were paying a higher yield than commercial paper.

Responding calmly to volatility

We had the experience to be able to separate the facts from the noise during the market panic of the onset of Covid. We bought ING 2021 bonds at an average yield of 1.81% in March 2020 after the liquidity panic had levelled off, but before yields returned to normality.

Drawing on credit expertise

In 2022 we have used the experience of our annuity credit team to include exposure to Anglian Water at higher yields than comparable corporate bonds and money market instruments.

Liquidity planning

We are always planning for potential gaps in liquidity – for example, in January and April 2022 respectively we bought BPI France and Rabobank certificates of deposit that will mature in January 2023, to ensure that we hold sufficient liquidity over the year-end, historically a time of year when it is less forthcoming from banks owing to the banks’ own liquidity requirements.

Building protection in a rising rate environment

As future expectation for interest rates pushes upwards, we have been building FRN holdings further as a means of protection for the portfolio, as they offer a high rating (AAA) and therefore high liquidity. They also offer stability as their spread relative to gilts/SONIA will move less than senior unsecured bonds, protecting the funds when rates are going up alongside the potential for quantitative tightening and a possible recession. The yield is also likely to increase as rate hikes are implemented.

[1] Morningstar, bid to bid, with income re-invested for I share class to 31/05/22
[2]Morningstar as at 31/05/22
[3] Credit ratings are internal and assigned by Canada Life Asset Management. Ratings will generally be in line with the major external rating agencies and should not be higher than the highest of these. Canada Life Asset Management will assign ratings to bonds that do not have an external rating.

Just Launched

More fund information

Providing Stability Through Saftey First 432Px By 240Px

LF Canlife Sterling Liquidity Fund

Aims to provide a return in line with sterling money market rates combined with a high degree of capital security

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Providing Stability Through Saftey First 432Px By 240Px

LF Canlife Sterling Short Term Bond Fund

Aims to provide stability of capital and an income through investment in sterling-denominated short-term fixed income and variable rate bonds including money market instruments

Learn more
Data Asset Management 1440X520

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Important Information

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.

This 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.

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.

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 fund 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.

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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.

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Expiry 30/06/2023