| Fund Company | Mackenzie Financial Corporation |
| Fund Type | Canadian Inflation Protected Fixed Income |
| Rating | $ |
| Style | Duration Matching |
| Risk Level | Medium High |
| Load Status | Optional |
| RRSP/RRIF Suitability | Fair |
| TFSA Suitability | Fair |
| Manager | Steve Locke since June 2010 |
| MER | 1.61% |
| Code | MFC 1579 – Front End Units MFC 1824 – Low Load Units |
| Minimum Investment | $500 |
Analysis: The Mackenzie Sentinel Real Return Bond Fund is designed to provide a steady flow of income will provide investors with a hedge against inflation. To do this, it invests in real return bonds issued by the Government of Canada and the province of Québec. It also can invest in real return bonds issued by foreign governments.
The way real return bonds provide a hedge against inflation is that the coupon payments and principal amount are adjusted based on the level of inflation that is in the economy. When there is inflation in the economy, the coupon payments and principal are adjusted upwards. Conversely, when inflation falls, so too does the adjustment on the coupon payments and principal.
The issue with this fund is not the fund itself, but rather real return bonds in general. It is a fairly competitive offering within the real return bond space. It is run by a good management team and is reasonably priced.
This issue is one of valuation. With real yield at historic lows, currently trading at 0.39%, there is really only one direction for them to go – up. Further, real return bonds tend to be very long duration bonds, which result in a very high level of interest rate risk for the fund. As rates move higher, it is expected that real return bonds will be hit harder than traditional bonds.
With inflation expected to remain low over the next several quarters due to the slow pace of economic growth at home and abroad, there is certainly a very strong case to be made that real return bonds are overvalued. Considering that, it seems inappropriate to add any additional real return bond exposure to your portfolio at the moment. In recent conversations with a number of bond managers, they suggested that now is a good time for investors who have significant real return bond exposure to consider taking some money off the table.
Investors looking for inflation protection may wish to consider investing in high yield corporate bonds. Those wishing to do so must be aware that they will be trading the interest rate of the real return bonds for the default risk of the high yield bonds. Those worried about rising interest rates may want to consider looking at floating rate note funds, which invest in notes which will pay a coupon that will fluctuate with the prevailing rate of interest in the economy.