Market Review
As we entered the second quarter, markets were in a relatively stable position, with expectations firmly set on a path of gradual interest rate cuts on a quarterly basis. However, this stability was temporarily disrupted by President Trump’s announcement of new tariffs on ‘Liberation Day’. The announcement raised concerns over potential retaliatory measures, inflationary pressures and the broader implications for global trade.
These developments introduced uncertainty into the interest rate outlook. On the one hand, inflation concerns pointed towards the need for tighter monetary policy. On the other, worries about the potential impact on Europe’s export sector, including job losses and a slowdown in growth, suggested the case for easing. This conflicting backdrop made the likely course of action from the Monetary Policy Committee (MPC) less clear.
In May, the MPC cut rates by 25 basis points to 4.25%, in line with earlier expectations. However, subsequent market volatility and mixed economic data, including some surprising GDP figures, led to a reassessment of the pace and likelihood of future cuts. At one point, expectations for further easing were significantly scaled back.
More recently, stronger-than-anticipated GDP prints have helped restore confidence in the growth outlook, reviving the view that the MPC may continue with its previously anticipated path of gradual, quarterly rate cuts.
Fund Activity
Market volatility around Liberation Day presented some attractive buying opportunities, and we were able to add value to the fund without increasing risk or duration. We were able to secure several well-priced deals as some institutions looked to offload risk.
Here, we added to our position in a six-month HSBC floating rate note at SONIA + 49bps and added new holdings in Toyota, reflecting our confidence in the strength of the issuer despite broader tariff concerns. We also increased our exposure to several high-quality bank names, including both European and US institutions, where yields were temporarily elevated due to market pressures.
In addition, we added a government-backed Canadian bond and increased our allocation to covered bonds from issuers such as Santander and Skipton, taking advantage of wider spreads. We also topped up our short-dated holdings with purchases of commercial paper from French government agency ACOSS.
Alongside this activity, we’ve been actively preparing for known outflows. We’ve focused on maintaining a steady balance in the fund by holding a high level of short-term deposits and overnight liquidity.
Outlook
Despite some fluctuations in market expectations around the path of interest rates, our strategy has remained consistent. We continue to anticipate a gradual, quarterly pace of rate cuts and are positioning the portfolio accordingly.
Our focus remains on identifying genuine value rather than chasing exposure for its own sake. In the absence of compelling opportunities, whether in bank bonds, floating rate notes or broader risk assets, we are comfortable increasing exposure to short-term instruments such as UK T-bills and high-quality government or supranational agency (SSA) assets.
Looking ahead, we will maintain our barbell strategy of balancing the pursuit of long-term value while ensuring a foundation of short-dated, liquid assets. This approach gives us flexibility to respond to changing market conditions while preserving capital and to seek attractive entry points as they arise.
Important Information
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.
The WS 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.
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.
