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Analysis: When interest rates move higher, as they are expected to do in the latter half of 2012, fixed income investments will fall in value. Not all fixed income funds are created equally as those funds which have a higher exposure to corporate bonds are expected to hold their value better since in most cases, corporate bonds are not impacted as much as Government of Canada bonds in rising interest rate environments. Also, those funds which have a shorter term to maturity are also expected to hold their value better when rates move higher.
The PH&N Total Return Bond Fund has significant exposure to corporate bonds, holding more than 52% of the fund in corporate bonds and only 3.0% of the fund in Government of Canada bonds. The fund also has a healthy 31% exposure to provincial bonds, which offer high yields than Canada’s and should outperform in a rising rate environment. From an average term perspective the fund has nearly 50% invested in fixed income instruments with a maturity of less than 5 years. The portfolio is also very high quality, holding 85% in bonds rated “A” or better.
The fund is managed in a very similar fashion to the PH&N Bond Fund. However, this fund has the ability to utilize a few nontraditional strategies including the use of high yield bonds, mortgages and derivative strategies. While the fund has lagged the PH&N Bond Fund recently, we expect it to outperform going forward. This opinion is based on two facts; the availability of additional strategies such as high yield and derivatives, and the smaller asset base. If employed correctly, the additional strategies will allow for better downside protection and the smaller asset base will allow the managers to be a bit more nimble in a challenging fixed income environment.
Within the context of a portfolio, it is our opinion that this fund is a great core holding for most investors. Because it exhibits relatively low levels of volatility and has shown low to negative correlation to the equity asset classes, this fund will be a great way to take overall volatility out of your portfolio and help provide downside protection in volatile markets.