When the Bank of England (BoE) lowered its base rate to 0.1% on the 19th March, the lowest level ever on record, the newly appointed Governor Andrew Bailey indicated that the central bank would not contemplate taking it into negative territory.
As the effects of covid-19 continued to shock economies around the world, central banks put in place unprecedented packages of support in the form of rate cuts and/or quantitative easing (QE) to stabilise financial markets and bring back a level of confidence to the capital markets. Whilst this for the most part has worked, further support may be required considering the varying forms of the lockdowns and their loosening taking longer than was initially anticipated.
Unsurprisingly, this has led Bailey to put all options under consideration to help support the UK’s economy including taking the BoE base rate into negative grounds. The markets have taken him at his word, with one-year gilts now trading at negative yields.
A view to a T-bill
So, where does this leave the LF Canlife Sterling Liquidity Fund in its quest for high quality, highly liquid assets whilst seeking yield?
We have previously taken advantage of the UK T-bill and gilt market, where it met the fund’s key investment requirements of Liquidity, Yield, Quality, Stability and Regular maturities. With T-bills now yielding less than 10bps in the secondary market, we are eyeing suitable alternatives and have increased our positions in sovereign, supranational and agency (SSA) assets. At the time of writing during the last week of May, the Fund had 14.3% invested in highly liquid SSA assets.
The likes of the European Investment Bank, Germany’s KfW and Canada’s EDC can often be bought at yields in line with bank paper but also with AAA ratings. Where they have been bought at lower yields, we see this as a small price to pay for the added security of high levels of liquidity. Because of the higher degree of stability in SSA assets, we feel confident holding such longer dated assets to maximise returns. Of course, this is within the remit of the Fund’s investment policy and means that the assets remain within the fund longer influencing our selection process for which yield assets can be bought.
Furthermore, we are also adding fixed interest assets in bank commercial paper and short dated bonds where we believe the issuer quality is high enough to withstand the potential disruption of a second wave of infection and can lock in returns for the Fund. For the time being, as the pandemic evolves, Liquidity, Quality and Stability remain the watchwords.
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.
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. This document is issued for information only by Canada Life Investments. 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 at www.canadalifeinvestments.com. 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.
Canada Life Investments 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 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.
CLI01632 Expiry 31/05/2021