Despite being made up of a mix of largely middle of the road funds, the fund of fund continues to offer investors strong risk adjusted returns and cash flow, all at a reasonable price.
TheportfolioisafairlystaticmixofRenaissance offered funds. Thetargetassetmixis 60% fixed income and 40% high yielding equities. This stays consistent, with turnover averaging less than 2% a year for the past five years.
Performance has been excellent, gaining an annualized 7.6% for the past five years, outpacing a blended benchmark (40% S&P/TSX, 60% FTSE/TMX Universe Bond) by an average of 88 basis points per year. Volatility has been higher than the peer group, largely because the equity weight in this fund is at the maximum for the category. Even with the higher volatility, it holds up well on a risk adjusted basis.
It pays a monthly distribution of $0.035 per unit. At current prices, this works out to an annualized yield of approximately 3.9%. If you are looking for more cash flow, there are T-6 and T-8 versions available.
There is no question the returns have been excellent, but as interest rates move higher, I expect it to face increasing headwinds because of its very high level of interest rate sensitivity.
To help address this, the managers recently added a 5% weight to the Renaissance Floating Rate Income Fund. Floating rate notes pay a coupon that fluctuates with the prevailing interest rates, making them a great hedge against rising rates.
Still, the of the 60% fixed income exposure, the half of it that is invested in the Renaissance Canadian Bond Fund which has a duration of 7.8 years, which is slightly longer than the FTSE/TMX Universe Bond Index. This means that once Canadian yields start moving higher, this portion of the portfolio is likely to struggle.
The other bond holdings, namely the Renaissance High Yield Bond Fund and Renaissance Global Bond Fund are both expected to hold up better thanks totheir more diversified geographic makeup and higher yields. This tends to make them less sensitive to rates.
There is also a high degree of interest rate sensitivity in the equity holdings, particularly in the Renaissance Canadian Dividend Fund. As is expected from dividend focused mandates, it is heavily concentrated in financials and energy names. As rates rise, many of the more interest sensitive names are expected to struggle.
The Renaissance Global Infrastructure Fund is likely to continue to do well. It invests companies exposed to long life, income generating infrastructure plays. A great feature of many infrastructure projects is they often have built in contractual protection against inflation, making them a great hedge, while still providing the opportunity for capital growth and income.
On balance, I remain positive on the Renaissance Optimal Income Portfolio. I believe it has the potential to deliver attractive relative returns. However, investors will need to dramatically reduce their return expectations as we move forward.
Still, it remains a good choice for those looking for a conservatively positioned balanced fund that offers a well-diversified, income focused portfolio at a reasonable cost.