Managed by Connor, Clark & Lunn, this is the closest thing Steadyhand has to a bond fund. It has a target asset mix of 75% fixed income and 25% high yielding equities, which makes it a good bond fund substitute for those with a risk tolerance that is average or higher.
Within the fixed income portion, it is heavily tilted towards corporate bonds, which make up about half the fund. The balance is invested in government bonds, with an emphasis on provincial bonds because of their higher yield relative to Canada’s. Credit quality is overwhelmingly investment grade, with only about 4.4% invested in high yield bonds.
The equity sleeve has an emphasis on yield, investing in dividend paying common stocks and REITs and other real estate securities. Given this focus, it’s not surprising to see the portfolio overweight in financials, real estate and utilities.
Performance has been excellent, gaining 7.8% for the five years ending April 30, handily outpacing both its benchmark and peer group. Shorter term numbers are equally impressive, gaining 8.8% in the past 12 months. Volatility has been slightly higher than its peers, both to the upside and downside.
As we move forward, I don’t expect that the historic performance can be repeated on an ongoing basis. This is because of the high level of interest rate sensitivity in the portfolio. While the bonds are extremely interest rate sensitive, so too are the majority of the equity holdings. In a falling or flat rate environment, these holdings have been able to post strong gains. However, once we start to see meaningful upward pressure on rates, I expect the fund to begin to face headwinds.
Even with these headwinds, I believe this fund is well positioned to outperform most traditional bond funds, with only modestly higher levels of volatility. I expect it to also hold up well against other conservative balanced funds. It has a great management team behind it, following a repeatable disciplined process, and it’s offered for a reasonable 1.04% MER.