This remains my top Canadian bond fund pick for a couple of reasons. The first is the excellent management team and investment process used by PH&N. Second, with interest rates in Canada more likely to stay flat or move lower, this fund, with its duration of 7.3 years and yield to maturity of 2.4% is more likely to generate stronger returns than either the TD Canadian Core Plus Bond Fund, or the ultra-conservatively positioned Dynamic Advantage Bond Fund in the near term.
The management team are quite active in the fund, and were again active in the fourth quarter trading into the heightened bond market volatility. They have slightly reduced the corporate bond exposure on liquidity concerns, and are focused on less cyclical industries and higher quality issuers. They are maintaining a meaningful allocation to provincial bonds for their liquidity and marginally higher yields. From a valuation perspective, they find real return bonds compelling, and have added some exposure within the fund.
As we move forward, I would expect the bond market to remain challenging, with volatility higher than normal. Also, until we see some level of stabilization in the price of oil and improvements to the Canadian economy, I would expect there to be more downward pressure on yields.
Given the challenging environment, I would expect that volatility within the bond market to remain high, but with there being more downward pressure on yields. This leads me to favour the higher duration position of this fund over the TD or Dynamic offerings. As the economy improves and there is upward pressure on yields, I’ll likely begin to favour Dynamic, given their very short duration positioning