On a risk adjusted basis, one of the strongest Canadian bond funds over the past five years has been the O’Leary Canadian Bond Yield Fund. It is managed with a focus on capital preservation by a team lead by Connor O’Brien at Stanton Asset Management.
The managers use an active investment process that blends a top down macro analysis, and bottom up security selection. The macro analysis is used to set the fund’s duration, credit quality and sector allocation. Security selection is done using a rigorous, fundamentally driven credit analysis that pays particular attention to a company’s financial strength and relative valuation within its peer group.
The managers believe that it is this emphasis on valuation that has allowed the fund to deliver better risk adjusted returns over the long term. For the past three years, the fund has gained 2.2%, underperforming the FTSE/TMX Canadian Universe Bond Index, but modestly outperforming its peers. However, factoring in the funds below average volatility, the risk adjusted returns are more impressive. For the past three years, the fund has an annualized standard deviation of just under 3%, while the index is just over 4%. The result is a Sharpe Ratio that is one of the highest in the category.
At the end of November, apart from a modest 2% weight in cash, the balance was invested in corporate bonds. It can invest up to 30% outside of Canada, and holds about 13% foreign content, the overwhelming majority of which is U.S. bonds.
With this focus on corporates, the yield is 3.8%, significantly higher than the index’s 2.1%. Further, the duration is also lower, coming in at 5.1 years, compared with 7.4 years for the index.
Because of its positioning and active management, I would expect it to outperform on a risk adjusted basis in flat or falling rate environments. However, if we see a big uptick in volatility, this fund would be expected to lag as investors run for the safety of government bonds.
O’Leary was recently sold to Canoe, however, the management team for this fund will be retained.