Steadyhand Income Fund

Analysis: Let’s just cut right to the chase. We like this fund – a lot! Looking under the hood, it is not hard to see why. It offers investors a good alternative to a traditional bond fund with its target asset mix of 75% bonds and 25% high yielding dividend paying stocks and REITs. As of December 31, it was 69% in bonds, 23% in equity and 8% in REITs.

Within the bond component of the fund, the focus is on corporate and provincial bonds, which make up the lion’s share of the exposure. While the emphasis is on corporates, the credit quality is very high, with only 7.3% of the bond component invested in bonds that are BB or lower. Bond exposure is focused on the short and midterm with only 19% of the fund having a maturity of more than ten years.

For the equity portion, the emphasis is on high yielding equities. Given that, it is not surprising to see that the majority is in financials and real estate and includes such names as the big banks, TELUS, and the Brookfield Infrastructure Partners LP.

Performance has been stellar, with a five year annualized return of 7.4%, outpacing the DEX Bond Universe, its benchmark, and its peer group by an impressive margin. Volatility has been higher than what you would get with a traditional bond fund, but is significantly lower than what you would experience with a typical balanced fund.

While the historic return has been great, we do not expect that it will be repeated with the current and expected interest rate environment. A good gauge of the expected return of a bond portfolio is its yield to maturity. The current yield to maturity of the DEX All Corporate Bond Index is approximately 2.9%. Assuming that 75% of the fund is invested in corporates, you can see how difficult it will be for the fund to deliver a 7% or better return, without seeing big gains from the equity sleeve. Given the names, that is unlikely on a sustainable basis. Instead, we expect more modest gains going forward.

It is our opinion that investors could consider this as a great fixed income replacement in their portfolios. We expect returns to be mid single digits at best. With the emphasis on corporates and equity exposure, it may experience periods of higher volatility when compared to a traditional bond fund. Still, we believe that the current positioning will allow it to outperform in both a flat and rising rate environment.