Market Overview
After a broadly positive first quarter, the second quarter of the year proved to be more of a mixed bag for financial markets. Some assets did well, with tech stocks producing strong outperformance thanks to excitement around artificial intelligence (AI), and that positivity extended into some other risk assets. Volatility continued to fall as there were no signs of broader financial contagion, after issues in the US banking sector earlier this year. However, sovereign bonds lost some ground as inflation remained sticky and central banks continued to raise rates. Commodities also struggled across the board, with Brent crude oil prices down for a fourth consecutive quarter.
Inflation remains particularly challenging for central banks, with the Federal Reserve (Fed) hiking by another 25 basis points in May and further hikes from both the European Central Bank (ECB) and Bank of England during the quarter. As hikes are negative for the value of sovereign bonds, US Treasuries, German Bunds and UK Gilts all fell significantly.
More positive economic data helped boost equity markets as the threat of recession, particularly in the US, was pushed back for now. The raising of the US debt ceiling by Congress during the quarter was also positive, as the threat of a US debt default was taken off the table.
Fund Review
During the period under review, the fund generated a negative total return. This was driven largely by our alternatives allocation, which has struggled, driven by higher gilt yields and a broad selloff in the UK mid-cap space.
Our most significant selling activity in the DMI fund during the quarter was driven by the conversion of preferred shares in biomedical companies Boston Scientific, Becton Dickinson and Danaher following their maturity dates.
We also made some sales in the portfolio to reflect a change in our fundamental view. We fully sold down our holdings in British American Tobacco, heavily weighed down by ESG concerns, and commercial real estate investor British Land, which we deemed to be struggling under the weight of ever-higher refinancing costs. We also completely sold down Vodafone, given the increasing weakness of the telecommunications sector.
Our purchases during the quarter have been dominated by sterling investment grade bond issues, which have been deliberately focused on shorter maturities (four to five years). These have come with attractively high coupons, helping to increase the yield of the portfolio.
Outlook
It has become increasingly clear that equities can rally against this inflationary backdrop, while fixed income continues to limp along. Equities have been supported by robust consumer demand that is directly helping revenues, while fixed income is still trying to form a base as core inflation continues to trend higher.
In such an environment, the strategy remains focused on optimising the income opportunity in the sterling corporate bond space where there is significant relative value versus other asset classes.
Â
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 fund 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.
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.
Promotion approved 31/07/23
