Market Review
During the quarter, market attention remained firmly on the outlook for interest rate cuts. While inflation showed signs of edging higher and wage growth remained persistently strong, these factors caused policymakers to take a more cautious stance. As a result, expectations for rate cuts were scaled back. Nevertheless, the Bank of England (BoE) proceeded with a rate cut in February, bringing the base rate down to 4.5%.
The BoE’s continued rate cutting process contributed to a period of relative stability in short-term interest rates, which in turn supported short-dated assets. Against this backdrop, we maintained a focus on shorter-dated assets while selectively identifying opportunities in longer-dated assets.
With interest rates starting to come down, we are presented with three potential strategies. One option is to selectively invest in one-year maturities, aiming to lock in yields now before rates fall further. Another is to move further along the curve, based on the view that rates will eventually catch up. The third option is to stay very short – investing from overnight to one week – to take advantage of current returns for as long as possible, stepping down gradually as rates decline.
Fund Activity
Against this backdrop, we maintained a relatively high allocation to overnight positions during the quarter, reflecting the continued stability in short-term rates as the rate-cutting cycle progressed. At the same time, we remained focused on selectively adding longer-dated assets where we saw value. Notably, we added a substantial position in a JP Morgan bond maturing in April 2026. The bond offers a yield of 5.2%, which we believe presents an attractive opportunity, particularly as we expect base rates to fall to around 3.75%.
During the quarter, a number of our supranational, sub-sovereign, and agency (SSA) holdings matured. Where possible, we’ve maintained exposure to this segment and added selectively where we identified value.
As part of our year-end planning, we purchased several assets maturing in January 2026, including a Toronto-Dominion Bank CD maturing on 2 January, offering a yield of 4.83%. This investment aligns with our strategy of carefully selecting longer-dated assets where returns justify the additional duration. The bond currently offers a yield premium of 33 basis points over overnight rates, which, if held to maturity, should deliver added value to the fund.
Outlook
On the global front, we believe that US President Trump’s proposed tariffs could create upward pressure on inflation expectations in the short term across global markets. Although the UK may be relatively less exposed, we still anticipate some negative impact, which could prompt the BoE to carefully reassess the pace and extent of future rate cuts.
Nonetheless, projections from the BoE, the Confederation of British Industry and other major bodies suggest that inflation is likely to come under control by year-end. On that basis, we expect the BoE to continue its rate-cutting cycle on a quarterly basis and maintain our expectation of three to four rate cuts throughout 2025, with the next move likely in May and a year-end base rate target of 4%.
Given this outlook, we plan to maintain our barbell strategy of seeking long-term value while ensuring short-dated positions are maintained.
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.
