Manulife Strategic Income Fund

Analysis: Interest rates are hovering near historic lows and will eventually begin moving higher. Before this happens, investors should take steps to protect themselves against this inevitability by shortening duration, increasing yield and investing in actively managed funds where the manager can be tactical in navigating the fixed income markets. The Manulife Strategic Income is one fund that can help investors do just that.

It is a tactically managed global bond fund that provides investors exposure to a wide range of fixed income investments with the added bonus of a dynamic currency overlay process which will help protect investors against adverse currency movements.

Dan Janis and his team invest in a number of different types of fixed income investments including high yield bonds, investment grade corporate bonds, global and emerging market debt, U.S. treasuries, and Government of Canada bonds. The team determines the appropriate sector weights based on a top down business cycle analysis which considers such things as yield spreads, and economic growth. Once the sectors are selected, they invest in the securities that they feel best positioned to benefit from their macro view, with an emphasis on yield generation.

The managers believe that high yield and emerging market debt will outperform sovereign debt over the long term. It holds about 17% in emerging market debt and more than 57% of the portfolio is invested in corporate bonds. Quality is relatively high, with an average credit rating of BBB. The portfolio has a yield of 5.17%, which is more than double the yield of the Citigroup Global Government Bond Index. The duration is also lower than the broader bond market coming in a 5.4 years versus 6.9 years for the index.

The managers are fairly tactical with this fund, having made some significant shifts within the sector allocation of the fund over the past few years to take advantage of some of the major trends. For example, in 2009 they dramatically increased their exposure to high yield bonds, moving it from more than 10% to nearly 40% of the fund by the end of the year.

While the shorter term performance numbers have been less than impressive, the long term numbers are solid. We believe that the managers have the fund well positioned for the current fixed income environment. We see this fund as a good diversifier within the fixed income portion of a well diversified portfolio. We are increasing the rating of the fund from $$$ to $$$$.