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Analysis: The best place to have your money in 2008 was in foreign bond funds. They all did amazingly well, especially when you consider the fact they were underachievers for years, in large part because of the rise of the loonie. When the Canadian dollar suddenly faltered in the fall of 2008, these funds started clicking on all cylinders. Currency gains combined with big moves in government bond prices to create perfect profit conditions for this category.
The AGF entry wasn’t number one on the performance chart but its gain of 26.9% for the year was well above average. What we like about it is a long track record of consistency. It is almost always in the top half of its peer group and returns over all time frames are better than the averages.
The fund invests in sovereign investment-grade fixed-income securities. That means you won’t find banana republic junk bonds in the portfolio. Rather, you’re buying into a mix of supranational bodies such as the European Investment Bank and government issues from countries such as Germany, the U.S., France, Japan, and, of course, Canada (20.5% of the total).
The managers use a top-down approach to bond selection which means they focus on countries and currencies where they see the greatest profit potential. Currently about one-third of the fund is in euro bonds with 25.7% exposed to the Japanese yen and 18.7% to the U.S. dollar.
The fund pays monthly distributions, so there is good cash flow. However, the size of the payments varies considerably from one month to the next. Over the year to Dec. 19/08 the fund paid out 35c per unit for a cash yield of 3.6%.
Timing means a lot with this type of fund. If interest rates decline and the Canadian dollar stays stable or falls further, we will see more gains in 2009. But if the loonie rises and interest rates move higher later in the year reflecting an improvement in the economic climate, the fund will bleed red ink. So you will need to keep a close watch on this one and be prepared to act if the dynamics turn against it. The fund has a good managerial team but they can’t do a lot when the macro economics work strongly against them.