Morningstar Minute: Fixed income under pressure

An underweight to government bonds and an overweight to corporates were a common theme for Medalist mutual funds.

Achilleas Taxildaris 19 December, 2016 | 6:00PM
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Achilleas Taxildaris: Fixed income assets, which tend to represent the stable, defensive portion of investors' portfolio, suffered heavy losses in the past two months, especially since the November 8th U.S. presidential election. Yields rose in the U.S. and Canada, with the Canadian broad fixed income benchmark, the FTSE TMX Canada Universe Bond, down close to 2% for the month of November after another 1% loss in October. It continued its negative course in the first week of December.

Many anticipated risk-off reaction after the unexpected Trump election that would favor bonds. But expectations that the new administration's policies will generate growth and inflation led to rapidly increasing yields and a soaring stock market. Long-term government bonds were hurt the most, while corporate bonds fared better. Within corporates, high-yield bonds had actually a positive November given their low duration or rate sensitivity. Finally, floating rate funds that aim to minimize duration risk were up by 0.8% in the past two months.

Our medalist funds within the Canadian fixed income category have outperformed the broad benchmark since the beginning of October to the end of November. A shorter duration and an underweight to government bonds, while overweighting corporate bonds and lower credit quality, was a common theme among most of our rated funds that contributed to a better showing these past two months.

Among them, the Silver-rated TD Canadian Core Plus Bond Fund managed to outperform the broad Canadian Bond Benchmark by 0.5 percentage points in the past two months with a 2.5% loss, while its 2.7% return since the beginning of 2016 to November's end beats the benchmark's 2.2%. Again, in shorter duration, an exposure to high-yield bonds helped, while its long-term government bond positioning detracted from performance.

Two of our medalists within the similarly struggling global fixed income category shone through for different reasons. The Bronze-rated DFA Five-Year Global Fixed Income Fund was down 1.5% for the past two months while returning 2.2% year-to-date as of November's end, outperforming its average peer. The fund's investors are exposed significantly less to interest rate risk while maintaining a pristine credit quality.

The Gold-rated Lysander-Canso Corporate Value Bond Fund had a positive return in October while remaining flat in November. Year-to-date through November, it has returned 7.3%, as management has been prudent by shielding parts of the portfolio from rising rates with the use of floating rate notes, while credit selection and high yield exposure have also been positive contributors.

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Achilleas Taxildaris

Achilleas Taxildaris  Achilleas Taxildaris is analyst for Manager Research and focuses on active strategies.

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