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
During the quarter, the yield curve from two years out to five years remained relatively flat. When combined with relatively tight spreads, there have been few opportunities to add value from fixed income bonds over the quarter.
In the current market environment, we have taken the decision not to chase ratings and spreads, instead focusing on maintaining the quality of the fund. We feel it is better to produce value for the fund using covered floating rate notes; over the quarter we tapped into newly issued three-, four- and five-year covered bonds issued at 44 to 60bps above the Sterling Overnight Index Average (SONIA). This strategy allows us to pick up an attractive spread on day one and hold that in the fund for the entirety of the highly rated and liquid bond.
We continued to add shorter-dated positions to shore up the short end of our holdings and to ensure we have an even flow of maturities coming through in future. Our trading strategy has also seen the average underlying rating of the assets in the fund continue to improve.
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.
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
