LF Canlife Portfolio Funds III-VII
We have entered a new phase in the path to economic recovery in which central banks are increasingly less accommodative as their employment targets are met and inflationary pressures increase.
Supply bottlenecks due to input shortages and lockdowns are proving to be less transitory than initially thought. These, combined with sharp rises in commodity and energy prices are causing inflation to spike, putting upward pressure on global bond yields. Consumer and business confidence appear to have peaked in Q2 2021 and are now being eroded by supply imbalances, an economic slowdown in China and a rise in Delta variant cases, especially in emerging markets.
Following its September meeting, the US Federal Reserve (the Fed) indicated that it will begin to reduce its asset purchases, probably in November this year, and phase them out completely in mid-2022. The Fed also indicated that US rates may rise to 1.75% by the end of 2024. This suggested faster rate increases than the market had expected, causing US Treasury yields to rise to 1.17% in early August, before selling off to close almost unchanged in Q3.
The Bank of England (BoE) indicated that it could raise interest rates in early 2022 after winding down its quantitative easing programme by the end of 2021. Gilt yields moved sharply higher on the news. The European Central Bank (ECB) also signalled a reduction in its asset purchases but emphasised that it does not intend to end its asset buying programme for the foreseeable future.
Global equities made modest gains in Q3, despite concerns over slowing economic growth, supply disruptions, rising inflation and indications from the US Federal Open Market Committee that tapering of asset purchases could commence as early as November.
Asia-Pacific equities fell back over the quarter as a potent mix of rising covid-19 cases and a relentless stream of bad economic news, regulatory changes and the potential default of China’s largest property developer took their toll on Chinese equities. Over the longer term, however, many Chinese companies will continue to benefit from relatively strong earnings growth.
Corporate bonds continued to perform well, particularly in financials and higher-beta names. Corporate bonds remain supported by historical low default rates and liquidity following last year’s record level of debt issuance and order books at record levels.
In the UK property market occupier demand is strengthening. The highest demand is for prime logistics and demand for offices is also improving. However, the retail property sector continues to be polarised between strong demand for warehousing and supermarket assets, and weak demand for high street retail and shopping centre units.
Fund Reviews – LF Canlife Portfolios III-VII
Over the quarter the Portfolio Funds continued to invest in line with their risk and strategic asset allocation parameters.
The Funds benefited from good relative performance among a number of underlying holdings. These included the LF Canlife North America Fund (a significant holding in Portfolios V, VI and VII), the LF Canlife Short Duration Corporate Bond Fund (mainly held in Portfolios III and IV) and the LF Canlife UK Equity and UK Equity Income funds, which are held across the range.
The main portfolio activity during the period was several adjustments to holdings to reflect changes made by Portfolio Funds’ strategic asset allocation provider, Dynamic Planner (DP). In its annual review, DP notes that “…negative real global bond yields mean their sensitivity to any interest rate rises remains elevated and correlation of returns between bonds and equities continue to remain stubbornly high…”.
In view of this outlook, all the Portfolio Funds now have an increased allocation to cash, which has been funded by a reduction in bond holdings. In addition, Portfolios V and VII have increased exposure to UK and North American equities, funded by reductions in Asia Pacific ex-Japan and emerging market equities. In Portfolio VI, exposure to Asia Pacific ex-Japan equities has been increased, while European equities have been reduced. In all cases, there has been no net increase in overall equity exposure.
The outlook for UK commercial property continues to improve, and investors and tenants are once again beginning to venture beyond the safest havens in the UK market. At the end of September, the Managers therefore reduced exposure to the iShares Developed Market Property Yield ETF in favour of increasing exposure to the UK commercial property market via the LF Canlife UK Property ACS in early October.
Overall, developed market equities show strong gains for the year to date, and exceptionally strong gains since the market lows of 2020. We expect the economic recovery to continue during the remainder of 2021 and into 2022, but it remains to be seen how much of the recovery is already reflected in stock prices.
The start of tapering brings with it the possibility that investors will reallocate away from equities, and particularly away from equities of companies with long-term growth attributes. However, the Fed will be keen to prevent market instability, and is therefore likely to avoid surprising investors with overly hawkish cuts in asset purchases. At the same time, equity markets continue to be supported by expectations for continuing earnings growth in the years ahead.
The combination of elevated equity valuations and a softer outlook for corporate earnings suggest that global equity returns will be lower for the foreseeable future. In addition, a rise in yields over the coming months is likely, with steeper yield curves reflecting a shift higher in inflation expectations. Investors can therefore expect to see further swings in the relative fortunes of growth and value areas of the market as investors attempt to gauge the outlook for inflation and earnings.
The key risks to our base case of a continued recovery during the remainder of 2021 and into 2022 are inflationary pressures triggering steeper interest rate hikes, lower-than-expected fiscal stimulus in the US, reductions in global trade caused by a slowdown in the Chinese economy and a resurgence in covid infections.
 Dynamic Planner, News from the Investment Committee, Q3 2021
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.
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 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 at https://www.canadalifeassetmanagement.co.uk/
LF Canlife Portfolio Funds 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.
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.
CLI01986 Expiry on 28/10/2022