Assessing the damage of rate hikes on Canadian bond funds

The impact of the Bank of Canada's decisions has been swift.

Jeffrey Bunce, CFA 14 September, 2017 | 10:00PM
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Jeffrey Bunce: It's been about three months since the Bank of Canada started signaling its intention to raise interest rates, two months since the first hike on July 12, and a little over one week since the second hike on Sept. 6. Even though these are shorter time periods to be looking at, the impact from the rate decisions has been swift. To see this, we can examine the broad-market Canadian bond ETFs from iShares, BMO and Vanguard. As a barometer for the Canadian bond market, these ETFs have each fallen a little over 3% since their peak in early June through Sept. 11. The Vanguard ETF has fared a bit worse than the iShares and BMO ETFs owing to it tracking a different reference benchmark, which possesses more government bonds and a slightly higher duration.

You may be wondering then, how active Canadian bond funds held up during this same time period? After all, one of the selling points for active fixed income management is the flexibility to manage interest rate risk and protect value in market sell-offs. Looking then at Canadian universe bond funds with no embedded commissions makes for the best comparison to the aforementioned ETFs. And, true to form, about two-thirds of fixed income funds did outperform their passive rivals since early June, net of fees. However, the median manager only outperformed by 10 basis points, or one-tenth of 1%, so the overall magnitude of outperformance was modest. Hardly a resounding endorsement for active management, although this may change given more time. What's more, some of the largest bond funds in Canada like RBC Bond, TD Canadian Core Plus Bond and Fidelity Canadian Bond underperformed the broad market ETFs.

Given this, you may well be disappointed in your active bond manager's performance over this stretch. While this is too short of a time period to draw any conclusions it does provide yet another data point in the active-passive debate.

For Morningstar, I'm Jeff Bunce.

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About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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