We are in extraordinary times, with inflation, rate hikes and significantly higher yields for the first time in a generation. Against this backdrop, it is hardly surprising that markets have been volatile, with dramatic changes in fortune within equity markets. This has led to a vast range of outcomes for funds with differing approaches.
The world of falling rates and yields followed the Global Financial Crisis in 2008, in turn causing higher valuation growth-oriented stocks to outperform almost every year since. This extended period of stylistic bias toward growth stocks has led similarly-biased funds to enjoy a significant period of time in the sun. However, the recent volatility, as higher rates and yields take hold, has led to substantial drawdowns in some of these strategies.
A time for active management
Given this volatility, it would seem unsurprising if investors were now drawn towards passive strategies. However, passive investment gives investors an index which is currently over-represented by growth stocks. This means that there is a stylistic bias even in passives, even if not always obvious. Given the way markets are changing, we believe that this really should be a time for active managers to deliver outperformance versus benchmarks.
Clearly, investors are drawn to a range of different attributes, whether this is the avoidance of excessive drawdowns, low volatility of returns or the amount of return the asset manager is targeting. With an ever-changing market environment, some investors might prefer to choose funds that are not wedded to a particular style, that can generate positive performance in different times. We believe this is the best approach.
We in the Global Equities team at Canada Life Asset Management have devoted considerable time to understanding how we manage assets and the likely performance outcomes generated. Our target is to manufacture a higher quality of return than our peer group, with relatively lower volatility and the avoidance of excessive drawdowns.
Finding the optimal level of risk and return can easily be overlooked in the chase for performance. Our contention is that a more balanced approach is much more likely to deliver better returns in more environments than a high-risk one and its associated drawdowns. Over time this should generate better outcomes.
We have reflected these considerations in the LF Canlife Global Equity Fund with an investment approach that targets a higher quality of return whilst avoiding excessive volatility and drawdowns.
How do we do this? We have in place a wide range of quantitative and qualitative parameters to encourage the right performance outcomes whilst also reflecting our economic perspectives. This enables us to seek returns from a wide variety of stocks, sectors, countries and styles without undue reliance on any one of them. We have a blended approach without ingrained stylistic bias, which we believe allows us to generate a high quality of return irrespective of market environment.
We also continually screen for contrarian names without reference to the type of stock or sector, giving us good entry points in names that have unjustifiably underperformed for a variety of different macroeconomic reasons.
In 2020, 2021 and 2022 (to October) only five funds out of the 321 that were in the global equity peer group for each of the three years outperformed the ETF – the L&G Global Equity Index Fund – in all three periods. One of these was the LF Canlife Global Equity Fund. While this is a pleasing statistic in its own right, it is important to note that the three years also had very different backdrops, which tended to favour different styles.
For example, 2020, once the Covid-19 pandemic took hold, was characterised by a highly negative narrative that suggested recovery was impossible. Following our contrarian approach, we bought a number of undervalued stocks based on our economic assessment, particularly in the consumer sector. Keys names were Netflix and Align Technologies, a leading dental aligner manufacturer. The following year, our focus was on the recovery theme as normality started to reassert itself. We took profits where necessary, and focussed on high quality growth stocks such as ASML and Novo Nordisk as well as contrarian consumer names like Live Nation and Navient.
This year, our style- and sector-agnostic approach has allowed us to achieve strong performance in a highly volatile environment. At the start of the year, our focus on nuclear power stocks benefitted the fund. This worked alongside several of our longer-term thematic plays. Netflix was once again a strong contributor as the market misunderstood the influence of return to office patterns.
More recently, we have started to position for peak hawkishness following the sustained period of tightening by central banks to try to rein in inflation. In doing so we have been shifting our emphasis from value to growth stocks and revisited familiar names on much lower valuations – such as Zoom, Netflix, Shopify and Exact Science. We have also continued to build out our allocation towards nuclear energy holdings – an area of the market that we feel has great long-term potential.
Our considered approach, without overt factor or stylistic bias, has allowed us to outperform in all three different phases.
How we invest: examples
Align is a leading provider of aligners to correct misaligned teeth. We bought into the company in late March 2020; with the stock trading at a market multiple, we viewed it as a compelling entry point. This followed a challenging period from late-2018 to early 2020 on concerns of increased competition and later the impact of COVID. We view Align as a high quality but highly discretionary company that should trade at a price to earnings ratio premium to the market. Economic sentiment has now dramatically improved and with more working from home and more video calls, demand has surged.
Our holding in Netflix represents a unique blend of our macro and bottom-up theses. We had previously held the stock throughout the pandemic, during which time user subscriptions – and with them the share price – rose dramatically as much of the global population were confined to their homes. We recognised that this trajectory could not continue forever and took the opportunity to sell in Q2 2021. However, much of the market did not, which ultimately led to an unfortunate correction for the streaming service, in turn bringing the share price down. Subsequently, and with many of the macro constructs having since been worked through and a new ad-based model on the horizon, we opted to revisit the holding at a more compelling valuation level in April 2022.
We first bought into US-owned BWX Technologies in February 2022. The company powers US Navy submarines and aircraft carriers using nuclear reactor propulsion, which gives both the strategic and environmental benefits of less frequent refuelling. It holds a strong commercial position as the only company in North America to have a commercial license to deal with highly enriched uranium, as well as holding long-term contracts with the US Navy as it upgrades its fleet, a strategic priority. The company also works within medical isotopes helping to better produce Molybdenum-99 for use in diagnostic imaging.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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.
No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.
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.
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.
This page is for information only. It 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 must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the Literature section.
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