| Fund Company | TD Mutual Funds |
| Fund Type | Canadian Short-Term Fixed Income |
| Rating | Not Rated |
| Style | Short Term |
| Risk Level | Low |
| Load Status | No Load / Optional |
| Manager | David McCulla since June 2003 Matthew Pauls since October 2012 |
| MER | 1.11% |
| Code | TDB 967 – No Load Units TDB 814 – Front End Units TDB 870 – DSC Units |
| Minimum Investment | $500 |
Analysis: When yields jumped higher in the summer, this fund did exactly what it was supposed to do, hold its value better than bond funds that have a higher exposure to interest rates. While some were surprised when it dropped by slightly more than 1% in May and June, it more than held its own compared to the nearly 3.5% drop in the broader DEX Bond Universe Index.
The reality is that short term bonds are not immune to increases in rates, but rather they are less affected by them. With more volatility in yields expected as speculation returns over when the U.S. Federal Reserve will begin to withdraw some of the stimulus it is providing the economy, it is possible that more months like May and June could happen. Still, short term bonds will likely hold up much better than any other type of bond when rates do move higher.
Within the short term bond space, this has long been one of my favourites. It is managed by David McCulla and Olga Bylaard and is conservatively positioned with a duration of 2.6 years, which is lower than the benchmark.
The portfolio is very high quality, with all the holdings being investment grade. To help boost the yield, the fund is heavily weighted toward corporate bonds. As of August 31, more than 62% of the fund was in corporates. Costs are reasonable, with an MER of 1.11%, which is in the lower half of the category.
Performance has been modest at best. Despite the disappointing absolute numbers, they are still in the upper half of the category. Given the interest rate forecast, I don’t expect much improvement in the medium term.
What the fund lacks in upside, it more than compensates with downside protection. In the past ten years, there has only been 2 times where it lost money in a 12 month period. The worst peak to trough drop was 1.42%.
I see this fund having two potential roles in a portfolio. First it can be a great short term parking spot for cash. While there is a chance it may post a loss, the magnitude is not expected to be substantial and should recover quite quickly. The second would be as part of your fixed income portion of your portfolio as a way to shorten the overall duration. By shortening the duration, you lower the potential losses that you might experience when rates move higher.