Market review
After the first quarter of 2024 saw a reversal of the large yield moves of December 2023, the second saw a stabilisation as markets began to understand that inflation was likely to come down more slowly than anticipated. While CPI inflation has indeed been reducing, wage and employment data has proved to be stickier than anticipated. This hampered the Bank of England’s (BoE) desire to cut rates more quickly.
This did not significantly impact performance for the fund, because of its short-term focus.
In taking no action in June, the BoE signalled a more amenable view towards cutting rates, and expectations are that it will cut by 25 basis points in August. It is unlikely we will see cuts on a regular basis and the Monetary Policy Committee will likely take a much shallower path than previously anticipated. This is reflected in asset prices, with one-year paper pricing at 5.25%, a level it has maintained for around three months.
Fund activity
The fund performed in line with its benchmark during the period. We are working on the assumption that the FCA will change the investment rules for money market funds, following the consultation that closed in March 2024. If carried forward, these regulations will require us to hold more overnight deposits and weekly assets to offset potential liquidity issues witnessed during the 2020 Covid ‘dash for cash’ and the 2022 liability-driven investing crisis.
We don’t yet know what the required daily or weekly liquidity thresholds will be, so we have been maintaining elevated overnight positions at around 20 per cent and increased our Weekly Liquid Assets (WLA). We have become used to maintaining a high overnight position and can adjust this as and when the markets and regulations allow. This approach has been largely neutral yield-wise as there has been negligible value further out in the curve for much of this quarter.
We have been continuing to maintain our exposure to Sovereign, Supranational & Agency assets (SSA). During the quarter we tried to time the movement into 12-month paper for assets that will maintain yield in a falling (albeit slowly) interest rate environment. We bought Canadian Pension Plan (CPPIBC), German government guaranteed (FMS) and Dutch agency (Nedwater) bonds, all maturing in June 2025. All of these assets are yielding around 5.10-5.20%, a little lower than what is available today in short-dated assets. However, the SSA assets have the advantage of forming part of our WLAs, are AAA/AA+ rated, highly liquid and also have scope to provide additional value as rates fall.We invested in covered bonds during the period, maintaining our allocation at around 27%. We have been adding these at Sterling Overnight Index Average (SONIA) plus 40bps. The spread had come down as the market started to take a more benign view of risk, but they still offered good value. We also bought a Lloyds Bank Capital Markets 11 July bond, at up to 40bps above 2-3 month commercial paper rates because of the anomalous way in which gilt benchmarked bonds can be priced close to maturity.
Outlook
We did not focus on adding duration during the period as we did not see a tremendous amount of value. We are looking for opportunities to add some term in the weeks ahead and to time that run to pick up some longer-dated assets with attractive returns that will hold their yield to maturity whilst short-dated rates drop away. We believe rates will be cut in the next quarter, the first of two rate cuts in the remainder of 2024, and another one or two in the first half of 2025.
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 WS Canlife Sterling Liquidity 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.
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 22/07/24
