25 March 2021
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Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The LF Canlife Global Macro Bond Fund is designed to provide investors with exposure to global interest rates, credit spreads and currencies within a high quality portfolio. We believe that adopting a truly global approach to fixed income allows the Fund to deliver significant return & diversification benefits for sterling investors, as part of a balanced fixed income allocation. Managed by David Arnaud & KJ Sinha, the Fund invests across six developed market currencies and its holdings are spread across investment grade government and corporate bonds, as well as countries, maturities and sectors.
The managers utilise top down macro analysis for setting interest rate and macroeconomic forecasts, which feeds into the Fund's duration and currency exposures. This is important as currency allocations are left unhedged, acting as a third return lever, alongside interest rates and credit spreads. They then utilise the support of our experienced credit research team for selecting the securities held within the portfolio. Every bond held must be internally rated by the credit team and the fund managers will undertake relative value analysis on their most favoured names, seeking to hold the issues that offer the best risk/reward characteristics.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
The Fund is unusual compared to many of its UK peers in that all foreign currency exposure is left unhedged. This is because it can provide significant diversification & correlation benefits versus domestic sterling fixed income. It also gives us an additional return lever to pull. For example as the Covid-19 storm took hold in March last year, our holdings in government bonds and overweight position in ‘safe haven' currencies such as the US dollar and Japanese yen helped minimise losses during the sell-off. However, more importantly, these positions also gave us the liquidity to be able to take advantage of attractive opportunities within the corporate bond space. As companies came to market to issue debt and shore up their balance sheets, we were able to invest in some very high quality companies at very attractive yields. This will deliver long-term benefits to the Fund in the form of receiving higher coupons, interest income which will then be passed on to our investors.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Currently, all fixed income assets have come under pressure, as inflation expectations have increased markedly. This has been driven by the substantial fiscal and monetary responses by the Federal Reserve and the US government - as well as a global economic recovery of course - putting upward pressure on government bond yields. However, although we believe that we will see some one-time asset price rises, we do not believe there will be a sustained increase in inflation in the short to medium-term. This is because there is a great deal of hidden unemployment in the global economy at present - due to various government schemes - and this should keep a lid on wage increases. Without higher wages, it is very difficult to maintain inflationary pressures.
Therefore, we believe much of these inflationary fears are now priced into the market and that the higher yields now available across global fixed income markets will provide an attractive entry point for fixed income investors in the coming months. In this more normal economic environment, we continue to favour corporate bonds and are now overweight more cyclical, recovery currencies such as GBP and EUR, in an about turn from this time last year. We are also finding further value in subordinated bonds from investment grade issuers and we are prepared to accept a lower position in the capital structure to pick up extra yield from fundamentally strong, high quality companies.
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