Scotia Global Bond Fund

Analysis: With a gain of 7.2% the Scotia Global Bond Fund was one of the top performing mutual funds in May. Nicholas Van Sluytman took over the reins of this fund in January 2010 and has rewarded investors with strong returns, gaining 7.5% in the past two years. In comparison, the Citigroup World Government Bond Index Fund gained 6.9% during the same period.

As the name suggests, it invests in bonds that are issued by foreign governments and corporations as well as supranational entities like the World Bank. It can also invest in foreign currency denominated bonds issued by Canadian corporations and governments.

The portfolio mix is set based on the manager’s analysis of the prevailing market conditions. He is looking to maximize returns while minimizing interest rate risk in the fund. The duration is 6.7 years, which is in line with the broader market. Currently, it is heavily weighted towards the U.S. holding 55% in U.S. Treasuries. They are carefully monitoring this position and while they don’t expect that yields in the U.S. will move higher during the year, they are ready to sell out should they see signs that this is likely to occur. In the past, they have been fairly active in their management of the fund. For example, in late 2011 they sold out all non-government debt in the fund and have no direct exposure to Portugal, Spain and Italy.

Despite the strong recent performance, we have a couple of big concerns with this fund. First is its volatility. It has a standard deviation that is four times greater than the DEX Bond Universe, which puts it at a level of volatility that is comparable to a Canadian dividend fund. That is much risk for a fixed income investor to take on. Second, it is a very expensive fund compared to others in the category. It carries an MER of 2.19%, 24 basis points higher than the category median.

The biggest positive of this fund is that it carries a very favourable correlation profile to the major equity indices. This will allow it to potentially help to reduce overall portfolio volatility when used in a well-diversified portfolio.

All things considered, we would suggest that investors approach this fund with caution. Given the risk reward profile, we do not consider it to be appropriate as a core holding in a portfolio. It is our opinion that this is a fund that should only be considered by investors who are comfortable taking on equity like volatility within their fixed income investments.