|
Analysis: In the fixed income world, it really doesn’t get a whole lot better than this. You get a well diversified portfolio that is managed by an experienced team that has a demonstrated track record dating back decades, and all for one of the lowest MERs in the category.
When interest rates move higher, as they are expected to do, fixed income investments will fall in value, which makes the present a potentially perilous time for fixed income investing. But not all fixed income funds are created equally. Those funds which have a higher exposure to corporate bonds are expected to hold their value better since in most cases, corporate bonds are not impacted as much as Government of Canada bonds in rising interest rate environments. Also, those funds which have a shorter term to maturity are also expected to hold their value better when rates move higher.
The PH&N Bond Fund has both of these advantages, holding more than 43% of the fund in corporate bonds and only 5.5% of the fund in Government of Canada bonds. The fund also has a healthy 31% exposure to provincial bonds, which offer high yields than Canada’s and should outperform in a rising rate environment. From an average term perspective the fund has nearly 50% invested in fixed income instruments with a maturity of less than 5 years. The portfolio is also very high quality, holding 89% in bonds rated “A” or better.
If there is a downside to this fund it is that it is somewhat limited with respect to the investment strategies that are available to the fund. For example, it can only invest in bonds that are rated “BBB” or higher, which limits the manager’s ability to add high yield which can add incremental returns to the portfolio. Further, the manager cannot utilize derivatives to help preserve value and add return.
Given our expectation of a flat to rising rate environment in the near to medium term, combined with the limitations on the strategies the fund may employ, we would favour the PH&N Total Return Bond Fund (PHN 340). The Total Return Bond Fund may invest in some high yield opportunities and may use some derivative strategies. We would expect that the Total Return Bond would outperform the PH&N Bond Fund in that type of fixed income environment.