| Fund Company | TD Mutual Funds |
| Fund Type | Canadian Short Term Fixed Income |
| Rating | $$$$ |
| Style | Short Term |
| Risk Level | Low |
| Load Status | No Load / Optional |
| RRSP/RRIF Suitability | Excellent |
| TFSA Suitability | Excellent |
| Manager | David McCulla since June 2003 Olga Bylaard since January 2009 |
| MER | 1.11% |
| Code | TDB 967 – No Load Units TDB 814 – Front End Units TDB 870 – DSC Units |
| Minimum Investment | $500 |
Analysis: With the current low interest rate environment, short term bond funds have become a great alternative to money market funds and GICs. Investing in diversified portfolio of bonds that mature in less than five years, these funds offer modest returns with very low risk. One of our favourites in the category is the TD Short Term Bond Fund.
Managed by David McCulla and Olga Bylaard, it is conservatively positioned with a duration of 2.6 years, which is lower than the benchmark. Duration is a measure of interest rate sensitivity, giving an estimate of how much the fund will move when there are changes in interest rates. In this case, if rates were to rise by 1%, it is expected that this fund would drop by 2.6%. In comparison, a traditional bond fund would be expected to fall by approximately 7%.
The portfolio is very high quality, with all the holdings being investment grade. To help boost the yield, the fund is heavily weighted toward corporate bonds. As of July 31, more than 64% of the fund was in corporates. Costs are reasonable, with an MER of 1.11%, which is in the lower half of the category.
Performance has been modest at best, with a five year return of 4.3% and a two year return of 2.4%. Despite the disappointing absolute numbers, they are still in the upper half of the category. Given the interest rate forecast, we don’t expect much improvement in the medium term.
What the fund lacks in upside, it more than compensates with downside protection. In the past ten years, there has only been 2 times where it lost money in a 12 month period. The worst peak to trough drop was 1.42%.
For investors, we see this fund having two potential roles in a portfolio. First it can be a great short term parking spot for cash. While there is a chance it may post a loss, the magnitude is not expected to be substantial and should recover quite quickly. The second would be as part of your fixed income portion of your portfolio as a way to shorten the overall duration. By shortening the duration, you lower the potential losses that you might experience when rates move higher.