Property is the golden child currently for David Marchant, chief investment officer at Canada Life, delivering solid yields and growth for his range of risk-targeted model portfolios.
The risk-rated 3 version of the fund, which has £16.1m in assets, has an 8 per cent allocation to property, which Marchant says has done “fantastically well”. In June it was the only positive contributor to returns for the fund “as sustained investor demand in the sector translated into a continued rise in capital values”.
“The commercial property market came off 50 per cent in the financial crisis and has had a good recovery since then, in particular in London and the South-east but now spreading out to the regions,” he says.
“The overall yield on the property portfolio is in the region of 5 per cent or so, which is excellent, rent is growing, capital values have some room for further upside.”
The Canada Life Portfolio range consists of five funds, with CanLife Portfolio 3 being the lowest risk version of the range and Portfolio 7 being the highest. All the funds are risk-targeted to the Distribution Technology risk rating tool and the asset allocation is determined by DT’s target asset allocation.
Marchant chooses not to put his own tilt or tactical allocation overlay onto the DT asset allocation, believing that doing so inevitably means that clients will be taking more or less risk than they intend.
“We don’t have a deviation against the risk allocation, no tactical tilts. If DT make a recommendation we will stick to it, so there are no surprises for advisers,” says Marchant.
“If you’re an investor and risk profile 3 reflects your attitude to risk you don’t want to find it’s gone to [risk profile] 4 or 5 three years down the road.”
However, he says the asset allocation team at Canada Life sense check the DT allocations and question whether they make sense, sometimes going back to DT to query anything they don’t agree with.
The team will also take their time making any changes to allocations prescribed by DT, waiting until the pricing is right and they are ready to move out of other areas.
Performance of the Portfolio 3 fund has been patchy, ranking third quartile over the short term – one and three months – but first quartile over a year. The fund was only launched at the end of 2013, so longer term performance is not available.
The most recent change on the fund was the introduction of high-yield bonds, which now make up 6 per cent of the Portfolio 3 fund, having previously been no allocation. The money for the new allocation was taken “across the board, from small tinkering” with other allocations, says Marchant.
“The benefit of high yield is it adds an extra element of diversification, which these funds are suppose to achieve,” he says.
However, Marchant was careful with the timing of the move into the asset class. “High-yield has already had a relatively good run, we did finesse the implementation and didn’t go into it until mid-December, which was pretty close to the lows in prices,” he says.
For the high-yield allocation Marchant invested in the Putnam World Global High Yield Bond Fund. The range of model portfolios has a skew to internal funds, always using a Canada Life fund if it is available.
If Canada Life doesn’t have a suitable fund, as with the high-yield allocation, Marchant will look among the group’s partners for a suitable option.
“We have not got high-yield expertise in house, Putnam is part of our group of companies and has experience and a long record of managing high-yield bonds, so we use their portfolio to provide asset allocation,” he says.
Only if this search among Canada Life’s partners turns up blank will Marchant look to other fund managers. The only instance of this occurring is in the allocation to the BlackRock ICS Sterling Liquidity fund, which has 9.8 per cent of the fund.
The benefits of using internal funds are multiple, says Marchant. “We benefit from being close to the fund manager, we know exactly what they are implementing with no surprises and it also is cost effective using our own internal managers.”
This selection process limits the choice of funds available, often driving it to just one option for each asset bucket. Marchant admits the size of Canada Life’s fund range means he has “not got a vast array of funds to choose from”.
The only area where this isn’t the case is in its UK equity allocation. Here the fund has the allocation split between two funds: the CF Canlife UK Equity Fund at 12.4 per cent and the CF Canlife UK Equity Income Fund at 3.2 per cent.
“I like the idea of income funds and recognise the importance of income, “ he says, leading him to put 20 per cent of the UK equity allocation in the income fund and 80 per cent in the core UK equity fund, although he says “that can change over time if required”.
Marchant is very positive for the prospects of the UK equity sector generally, predicting a boost in consumer spending will help to drive the economy up.
“There is rising employment, real wages are going up, consumer sentiment is at relative highs and oil prices are low and weakening more recently, so the outlook for the UK consumer is pretty good,” he says.