TD Income Advantage Portfolio

Analysis: With interest rates at historic lows and expected to remain so for the near term, many investors are looking for alternatives to traditional bond funds. The TD Income Advantage Portfolio is one option that investors may want to consider. It is set up as a fund of funds that invests in other TD Mutual Funds.

It has a target asset mix that is set at 75% fixed income and 25% equity. The equity exposure is conservative in nature, and is achieved by investing 20% of the fund into the TD Dividend Income Fund, and 5% in the TD Global Low Volatility Fund. In September, the fund’s equity exposure was bumped up from 20% to the current 25%.

The fixed income exposure is invested in a mix of TD managed bond funds providing exposure to short term bonds, traditional bond, and high yield bonds. It is heavily weighted towards corporate bonds, with modest exposure to government bonds. This positioning should help protect the downside in a rising rate environment, and should provide additional income in a flat rate environment.

Longer term, the performance has lagged that of a traditional bond fund. Given the equity exposure, this is not surprising. However, looking ahead, we believe that this fund is well-positioned to outpace a more traditional bond fund. The equity, high yield and corporate bond exposure should help to provide better returns in a flat rate environment, and better downside when rates do move higher.

Costs are reasonable, with an MER of 1.66%, which is below the category average for a balanced fund, but only modestly higher than a traditional bond fund.

We like this fund as an alternative to a traditional fixed income fund for the current environment. A caveat is that with the higher exposure to equities, the fund will be more volatile than a traditional bond fund. As long as investors are aware of this and comfortable accepting this additional risk, the fund can play a role in a well diversified portfolio.