Canada Life Investment Management Ltd.
Headnote
National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from subsection 2.1(1) of National Instrument 81-102 -- Investment Funds to permit funds to invest more than 10 percent of net assets in debt securities issued, or guaranteed fully as to principal and interest, by foreign governments or supranational agencies -- subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1) and 19.1.
July 27, 2022
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
CANADA LIFE INVESTMENT MANAGEMENT LTD. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Canada Life Global Strategic Income Fund, Canada Life Strategic Income Fund, Canada Life Strategic Income Fund II, Canada Life Global Balanced Fund and Canada Life Pathways Global Core Plus Bond Fund (the Current Funds), and investment funds subject to National Instrument 81-102 Investment Funds (NI 81-102), that may be established in the future from time to time and are or will be managed by the Filer or by an affiliate or successor of the Filer (the Future Funds and together with the Current Funds, the Funds), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), for an exemption from subsection 2.1(1) of NI 81-102 (the Concentration Restriction), to permit each Fund to invest up to:
(a) 20% of its net assets, taken at market value at the time of purchase in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America and are rated "AA" by S&P Global Ratings (S&P) or its "DRO affiliate" (as defined in NI 81-102), or have an equivalent rating by one or more other "designated rating organizations" (as defined in NI 81-102) or their DRO affiliates; and
(b) 35% of its net assets, taken at market value at the time of purchase, in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America and are rated "AAA" by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates (such evidences of indebtedness are collectively referred to as Foreign Government Securities)
(together, the Requested Relief)
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions and together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
Background Facts
The Filer
1. The Filer is a corporation governed under the laws of Canada with its head office in London, Ontario.
2. The Filer is a wholly-owned investment management subsidiary of The Canada Life Assurance Company.
3. The Filer is registered as a portfolio manager in each province and territory of Canada; as an investment fund manager in each of Ontario, Québec and Newfoundland and Labrador; and as a commodity trading manager in Ontario.
4. The Filer is the manager, trustee and portfolio manager of each Current Fund. The Filer or an affiliate will be the manager of the Future Funds.
5. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Funds Generally
6. Each Fund is or will be an open-ended mutual fund trust established under the laws of Ontario.
7. Securities of the Current Funds are offered pursuant to a simplified prospectus filed in all the provinces and territories of Canada (each, a Simplified Prospectus) and, accordingly the Current Funds are reporting issuers subject to NI 81-102, and securities of the Current Funds are available for distribution in each of the Jurisdictions.
8. None of the Current Funds are in default of securities legislation in any of the Jurisdictions.
9. Each Future Fund will prepare and file either a Simplified Prospectus under National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) or a longform prospectus and ETF Facts (if applicable) (each a Prospectus) under National Instrument 41-101 General Prospectus Requirements to distribute their securities in one or more of the Jurisdictions and will be a reporting issuer subject to NI 81-102.
Canada Life Global Strategic Income Fund
10. Canada Life Global Strategic Income Fund's investment objective is to seek to provide current income with the potential for long-term growth by investing primarily in fixed income and/or income-oriented equity investments from issuers anywhere in the world. The Fund will pursue this objective by investing in securities directly and/or by investing in mutual fund securities.
11. The Fund has the flexibility to invest across all fixed income credit qualities and can invest in a wide variety of assets from anywhere in the world including government bonds, high yield bonds and loans.
12. The portfolio managers of the Fund will allocate assets across credit quality, duration, structures, sectors, currencies and countries in a risk-efficient manner. In following this style, in conjunction with fundamental investment analysis, there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund's investment objectives.
13. Allowing the Fund to hold highly rated fixed-income securities issued by foreign governments will enable the Fund to preserve capital in foreign markets during adverse market conditions, have access to assets with minimal credit risk and enable the portfolio manager to assess its views on interest rates and duration.
14. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or United States of America shorter-term government fixed-income alternatives.
Canada Life Strategic Income Fund
15. Canada Life Strategic Income Fund's investment objective is to aim to generate income by investing primarily in a diversified portfolio of fixed income securities issued by companies or governments of any size, anywhere in the world. The Fund also seeks to achieve long-term capital growth by investing in fixed income securities and other investments. The Fund will employ a flexible approach, allocating assets across credit quality, structures, sectors, currencies and countries.
16. The Fund will pursue a flexible approach to investing in fixed income and/or equity asset classes anywhere in the world. The Fund will generally invest 30% to 70% of its assets in any one asset class, but may invest 0% to 100% of its assets in any one asset class. Allocations between asset classes are based on economic conditions and/or the portfolio manager's assessment of relative valuations. Fixed income investments may include, but are not limited to, fixed income securities, corporate bonds (investment-grade and non investment-grade), convertible bonds, and/or government bonds. The Fund may hold cash and/or short-term debt securities in anticipation of, or in response to, unfavourable market conditions, and/or for liquidity purposes.
17. In respect of fixed income portion of the Fund's portfolio, the portfolio managers of the Fund will allocate assets across credit quality, duration, structures, sectors, currencies and countries in a risk-efficient manner. In following this style, in conjunction with fundamental investment analysis, there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund's investment objectives.
18. Allowing the Fund to hold highly rated fixed-income securities issued by foreign governments will enable the Fund to preserve capital in foreign markets during adverse market conditions, have access to assets with minimal credit risk and enable the portfolio manager to assess its views on interest rates and duration.
19. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or United States of America shorter-term government fixed-income alternatives.
Canada Life Strategic Income Fund II
20. Canada Life Strategic Income Fund II's investment objective is to seek to provide current income with the potential for long-term capital growth by investing in a portfolio of fixed income and/or income-oriented equity investments, either primarily through ownership of other Canada Life Funds or by investing in fixed income and/or income-oriented equity securities directly.
21. The Fund will pursue a flexible approach to investing in fixed income and/or equity asset classes anywhere in the world. The Fund will generally invest 30% to 70% of its assets in any one asset class, but may invest 0% to 100% of its assets in any one asset class. Allocations between asset classes are based on economic conditions and/or the portfolio manager's assessment of relative valuations. Fixed income investments may include, but are not limited to, fixed income securities, corporate bonds (investment-grade and noninvestment-grade), convertible bonds, and/or government bonds. The Fund may hold cash and/or short-term debt securities in anticipation of, or in response to, unfavourable market conditions, and/or for liquidity purposes.
22. In respect of fixed income portion of the Fund's portfolio, the portfolio managers of the Fund will allocate assets across credit quality, duration, structures, sectors, currencies and countries in a risk-efficient manner. In following this style, in conjunction with fundamental investment analysis, there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund's investment objectives.
23. Allowing the Fund to hold highly rated fixed-income securities issued by foreign governments will enable the Fund to preserve capital in foreign markets during adverse market conditions, have access to assets with minimal credit risk and enable the portfolio manager to assess its views on interest rates and duration.
24. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or United States of America shorter-term government fixed-income alternatives.
Canada Life Global Balanced Fund
25. Canada Life Global Balanced Fund's investment objective is to seek capital growth and current income by investing primarily in a combination of equity and fixed income securities of issuers located anywhere in the world.
26. The portfolio manager has the ability to move from 0% to 100% between equities and fixed income securities. The fixed income portfolio manager employs a value investment style. For high-quality bonds, the fixed income portfolio manager analyzes macroeconomic factors, such as economic growth, inflation, and monetary and fiscal policy, in order to position the maturity and credit quality of the fixed income portfolio for different stages in the economic cycle. The fixed income portfolio manager analyzes securities that typically have a lower credit quality, such as high-yield debt securities, using a bottom-up approach to assess their valuation. This company-specific analysis focuses on stability of cash flows and recovery value of the debt instruments. The Fund may hold cash and/or short-term debt securities in anticipation of, or in response to, unfavourable market conditions, and/or for liquidity purposes.
27. The Fund has a foreign investment mandate and invests globally. The Requested Relief would enable each Fund to expose the fixed income and cash equivalents portion of its portfolio to foreign markets, consistent with the Fund's foreign investment mandate. Allowing the Fund to hold highly rated short-term Foreign Government Securities would enable the Fund to preserve capital in foreign markets during adverse market conditions.
28. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or United States of America shorter-term government fixed-income alternatives.
Canada Life Pathways Global Core Plus Bond Fund
29. Canada Life Pathways Global Core Plus Bond Fund's investment objective is to seek income with the potential for long-term capital growth by investing primarily in fixed income and/or income-oriented equity securities.
30. The investment approach follows a value investment style maximizing the relative value for risk around the world. The Fund has the flexibility to invest across all fixed income credit qualities and can invest in a wide variety of assets from anywhere in the world including government bonds, high yield bonds and loans. In following this style, in conjunction with fundamental investment analysis, there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund's investment objectives. The Fund can allocate to assets across structures, sectors, currencies and countries. The Fund may invest up to 100% of its net assets in any one sector. The Fund may also hold cash and/or short-term debt securities in anticipation of, or in response to, unfavourable market conditions, and/or for liquidity purposes.
31. Allowing the Fund to hold highly rated fixed-income securities issued by foreign governments will enable the Fund to preserve capital in foreign markets during adverse market conditions, have access to assets with minimal credit risk and enable the portfolio manager to assess its views on interest rates and duration.
32. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or United States of America shorter-term government fixed-income alternatives.
Necessity for Relief
33. The Concentration Restriction prohibits a fund from purchasing a security of an issuer, other than a "government security" as defined in NI 81-102, if immediately after the purchase more than 10% of the net asset value of the fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.
34. Foreign Government Securities are not within the meaning of "government security" as defined in NI 81-102.
35. The Filer believes that the ability to purchase Foreign Government Securities beyond the limit in the Concentration Restriction in NI 81-102 will better enable the Funds to achieve its fundamental investment objectives, thereby benefitting the Funds' investors. Accordingly, the Filer is seeking the Requested Relief for the Funds.
Generally
36. Each Fund will only purchase Foreign Government Securities if the purchase is consistent with that Fund's fundamental investment objectives.
37. The Funds' Prospectus will disclose the risks associated with concentration of net assets of the Fund in Foreign Government Securities.
38. The Filer believes the Requested Relief will enhance the Funds' ability to pursue and achieve their investment objectives.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
1. the Funds have investment objectives and strategies that permit them to invest a majority of their net assets in fixed income securities, including Foreign Government Securities;
2. paragraphs (a) and (b) of the Requested Relief cannot be combined for any one issuer;
3. any security that may be purchased under the Requested Relief is traded on a mature and liquid market;
4. the acquisition of Foreign Government Securities purchased pursuant to this decision is consistent with the fundamental investment objectives of the Fund;
5. the Fund's Prospectus discloses the additional risk associated with the concentration of the net asset value of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and
6. the Fund's Prospectus discloses, in the investment strategies section, a summary of the nature and terms of the Requested Relief, along with the conditions imposed and the type of securities covered by this decision.