The CF Canlife Short Duration Corporate Bond fund came to market in September 2016 among a swathe of launches in the space. At around the same time Aberdeen and Standard Life Investments also launched similar funds on the back of low corporate bond yields and the potential for interest rates to move higher.
Managed by Michael Count and Steve Matthews, the CF Canlife Short Duration Corporate Bond fund primarily holds a diverse range of investment grade corporate debt with the aim of providing sustainable income alongside capital preservation.
The fund has 58 holdings, sits in the IA Sterling Corporate Bond sector and is benchmarked against the iBoxx UK Sterling Non-Gilts 1-5 Years index, although strictly speaking the fund is no more than aware of the benchmark.
Bonds with a credit rating of A- to AAA make up 37.7 per cent of the fund while the remaining 62.3 per cent is in BBB- to BBB+ bonds. A total of 91.9 per cent is in corporate bonds and 8.1 per cent is in cash, with no exposure to gilts at the moment.
“We have been running short-dated funds in our life and pension series since March 2014 and they were reasonably popular so we launched the short-dated Oeic in September 2016,” Count says.
The fledgling fund was seeded with £5m and now has £30m in assets under management while the life and pensions strategy has £70m in AUM.
In terms of assets, Count says they are seeing steady flows through the Canada Life Portfolio funds, adding that attracting external money is a long game.
“We have been talking to people as they are worried about interest rate increases. These things tend to take some time. Quite a few houses have launched these funds as well,” Count says.
“This is not a £5bn fund. But we can easily get to £500m without changing our style. There is plenty of scope.”
On the direction of interest rates, Bill Harer, head of fixed income, credit research & UK linked funds, says the committee mindset has a lot to answer for.
“From an investment point of view we are mindful of loose monetary policy as it pushes up the value of all sorts of assets,” Harer says.
“That’s why bonds are not a terrible thing to have. When everything is under pressure investors need diversification. When you look at the central banks you have got to remember that they are committees. They are afraid of being blamed for. The MPC is afraid of Brexit hitting growth. They don’t want to raise rates and get blamed for a slowdown in the economy. UK rates will eventually tighten but it will not be in a hurry.”
Canada Life’s retail bond funds are run in the same way as the firm’s annuities book, Count says.
“We do credit analysis and select the companies happy to lend to. We take a buy and hold approach. We are continually reviewing the companies we lend to. If there are changes to the corporate structure or management obviously our view changes. We try to spot potential problems before they are widely known.”
Although new issuance in the UK was down considerably last year, Count says this year it has been “more healthy”, although he adds that quantitative easing is continuing to distort the markets with the ECB and Bank of England’s move to corporate debt last year proving tricky for investors in “vanilla non-financial” bonds.
“When there is a big and indiscriminate buyer it means there is not much difference in pricing between companies with different risk. We tend to own the safest ones as we are not being paid more to go down the quality spectrum.”
However Count says the pub sector has been beneficial to the fund; the current allocation to pubs is 2.4 per cent.
“It’s a sector people disliked. Some of the businesses are overextended but some players are solid and offer good value,” he says.
“Rating agencies hate pubs, but there are 2,000 or 3,000 pub buildings around the country and it is a rising property market. A lot of the properties have value; there is the potential for alternative uses. Our internal credit work disagrees with the ratings agencies. They might say that pubs are sub investment grade, but our assessment is that they are investment grade and it is a risk we are getting paid for.”
Count is also positive on the outlook for financials, notably insurers where the fund has an overweight position at 11 per cent.
“Financials are not being bought by the Bank of England. The fundamentals of banks are good and improving and spreads have caught up with volatility,” Count says.
“We see value in insurers; the new regulation has improved their capital levels. The businesses are profitable and well diversified. Being part of an insurance company we also have knowledge of insurers’ balance sheets.”
Since launch the fund has returned 1.23 per cent against the 0.25 per cent IA Sterling Corporate Bond sector average, according to FE data.