| Fund Company | Dynamic Funds |
|---|---|
| Fund Type | Canadian Fixed Income |
| Rating | B |
| Style | Duration Management |
| Risk Level | Low - Medium |
| Load Status | Optional |
| RRSP/RRIF Suitability | Excellent |
| Manager | Michael McHugh since July 07 |
| MER | 1.58% |
| Fund Code | DYN 258 –Front End Units |
| DYN 688 – DSC Units | |
| Minimum Investment | $500 |
Analysis: In an environment where interest rates are moving higher, I believe this is a bond fund you will want to own.
The management team places an extraordinary focus on preserving capital, and actively manage the portfolio’s duration, yield curve positioning, sector exposure and credit quality to help do so.
At the end of March, it held 39% in investment grade corporate bonds, 37% in government bonds, 11% in real return bonds and floating rate notes, 8% in high yield and the rest in cash. This resulted in a yield to maturity of more than 4% and a duration of 3 years, which is less than half the FTSE/TMX Bond Universe Index.
Management believes that this conservative positioning is warranted, given the uncertainty and potential for higher than normal rate volatility. This is further reinforced by recent numbers that show that the economy is on the mend. It is no longer a sure thing that the next move from the Bank of Canada will be a cut in rates.
In a recent commentary, management stated they intend to keep their duration lower until there is a sustained move in ten year bond yields, at which point they will look at increasing duration. They are also using interest rate swaps to better manage risk.
This strategy is likely to outperform when rates are volatile or moving higher. However, it is also expected to result in underperformance in a flat or falling rate environment, compared with the PH&N Total Return Bond and the TD Canadian Core Plus Bond Fund. At the end of March, both of these funds had a duration that more than double this fund.
Given that rates in Canada are extremely unlikely to rise significantly in the near term, I am favouring the longer duration funds. However, as we start to see the economy gain further momentum, the possibility of a rate increase will become more likely. As that happens, The Dynamic Advantage Bond Fund will once again become my top bond fund pick. If you hold it, I would likely hang tight as it is still a quality fund, just likely to underperform in a flat or falling rate environment.