Canada Life Asset Management is the winner of the Best High Income Fund category for the 2024 Professional Adviser Awards. In the below interview, we delve into the insurer's investment philosophy and how it has navigated tricky markets...
How did the team navigate the difficult market conditions in 2023 and what is the longer-term impact for the fund?
Over the course of another particularly volatile year, in 2023 the fund benefitted from its ability to selectively allocate to both income and capital growth ideas in the portfolio. Fixed income is an important contributor to our smooth income profile.
Being nimble proved important. As yields rose and bond prices fell in the first half of the year we added, selectively and in particular, to shorter-dated sterling corporate bonds, increasing their weight from 14.5% to 28.6% over the first nine months of the year. We felt the yields on offer for high-quality business with short maturities were a once-in-a-generation opportunity. By October, when yields fell significantly, the bonds provided excellent capital returns for the fund in the final quarter of the year.
Within the equity allocation, the fund benefitted from its exposure to lower-dividend paying, higher-growth companies, demonstrating its ability to expertly balance the trade-off between income and capital growth. Purchases in 2023 included Amazon, Cadence Design and ASML, which all generated very strong performance, alongside the high-quality growth incumbent (and largest portfolio position) Microsoft, which was up almost 50% over the year.
In the longer term, the transition by financial markets to a higher interest rate environment in 2023 is now affording the fund more opportunities to be nimble than before.
What is key to your investment process with the fund?
The fund's investment process is designed to support its aim of paying a steady monthly income by finding the optimal balance between income and capital growth opportunities (the fund avoids the ideology of ‘yield at any expense'). The capital growth element should allow the fund to increase dividends each year, helping combat inflation while still offering consistency of income.
To achieve this balance between income and capital growth, our investment process continually assesses for the relative value in allocating to the highest-yielding assets. This means the fund is not concentrated in (for example) high yield bonds or heavily reliant on equity sectors conducive to high dividend payers. By focusing on multiple factors within our process and utilising a more unconstrained approach to security selection, the fund can aim to maximise returns on a risk-adjusted basis.
What is Canada Life Asset Management's investment philosophy?
As an asset manager, Canada Life Asset Management focuses on the long term and we believe that active management is the best way to add value for clients and generate superior returns.
How does the fund fill a gap in the market?
The fund was designed to fill the gap between clients looking for greater certainty with annuities but with the desire to remain fully invested across all markets. Where the WS Canlife Diversified Monthly Income Fund differs from peers from an income standpoint is that it aims to pay a steady monthly income, in pounds and pence, per unit. This is important to investors looking principally for an income, as underlying capital movements do not affect the income profile.
The fund has demonstrated consistency of income since inception and paid out income, per its mandate, from the beginning. We have also been able to increase this every year. As an example, when inflation averaged 10% in 2022, the fund increased its income by 10% to accommodate. This income is reviewed annually. So for those clients who want the flexibility of a daily priced fund, with the aim of increasing their capital over time, and still require a consistent income, the fund has, to date, managed exactly that.
What has been the biggest learning curve for the fund and how did that change the approach for the future?
The fund was incepted in 2019, a period in which bond yields were low. The monetary policy reaction to Covid-19 a year later put further downward pressure on bond yields, making it difficult, from a portfolio construction perspective, to achieve the 4% yield without taking material equity risk. This meant balancing volatility with our ability to generate a smooth income profile.
Although the subsequent structural move to a world of higher interest rates and consequently higher bond yields has been to the advantage of the fund, it has also required us to optimise more accurately the allocations across equity, bonds and property/infrastructure positions based on where we think the relative value is in yield terms.
We also now assess even more carefully the ability of businesses to pay out their higher yield. We more regularly see examples of industries that are exposed to higher interest costs or higher discount rates, which is to the detriment of their business model. In today's world, a higher yield may appear attractive for an income fund, but do we believe that business will maintain the ability to deliver that income? At lower interest rates, it was easier to have more conviction.
Meanwhile, the higher-yield environment for bonds has allowed the fund to lower its allocation to higher dividend paying equities (most notably FTSE 100 businesses) and allocate more lower dividend paying, growthier equities (most notably US and European businesses). This has helped the fund optimise the capital growth element of returns.
https://www.canadalifeassetmanagement.co.uk/
