Starting the quarter with a duration that basically matched the FTSE/TMX Universe Bond Index was one of the factors that allowed the fund to outperform its peers in the third quarter. This longer duration allowed it to see a nice gain after the Bank of Canada cut its benchmark overnight lending rate in July.
As the quarter progressed, the focus shifted to the market’s expectation over a potential move for the U.S. Federal Reserve to begin moving rates higher. Because of this, management became concerned over the increasing pressure on yields, and pared the duration back. At the end of September, the duration was 7.0 years, slightly below the 7.3 years of the index.
They also started the quarter underweight in corporate bonds, which proved to be a good call, with corporate and high yield issues experiencing a big selloff over the summer. After the drop, management stepped in and picked up some attractively priced issues.
At September 30, it held 47% in government bonds, and 44% in corporate bonds. They have also recently added a modest position in real return bonds, as they believe they are mispriced by the market.
Given the positioning, and active management approach, I expect it to be the best performing Canadian bond fund on the recommended list in the near term. It offers a duration that is roughly in line with the index, and a yield that is stronger. This should allow it to do well in a flat rate environment, and if we do see another cut from the Bank of Canada, which at the moment is not expected, this fund will outperform. It also has a great management team in place, using a very disciplined and repeatable process.
My preference would be to use the lower cost D or F Series of units, but even paying full freight of the Advisor Series Units, the fund remains my top Canadian bond pick for the near term.