We recognize managers' skill in navigating the bond market with the Morningstar Fixed-Income Manager of the Year award. The award acknowledges strong returns over the past year, but short-term returns take a backseat to long-term fundamentals. After all, there's a lot of noise in short term numbers; a one-year hot streak is often the result of luck or extreme risk taking.
The interest rate environment continued to surprise fixed income managers in 2015. Most Canadian bond fund managers we spoke with expected higher rates, but the Bank of Canada startled the bond market with an unexpected rate cut in January and did so another time later in the year. Falling rates boost returns from bonds -- yields and prices move in opposite directions -- but these managers were not as well positioned to benefit.
Meanwhile in the United States, the Federal Reserve kept short-term interest rates steady amid mixed economic data, defying expectations that the central bank would finally nudge rates upward. Worries over the health of the global economy and faltering commodity prices hit energy issuers hardest and led to muted gains overall in corporate bonds.
Medalists like TD Canadian Bond and RBC Bond have fared decently in this environment, but their managers didn't distinguish themselves enough to make it to the finalist stage. After vigorous debate, our six-person manager research team identified just two management teams meeting our standards for the award.
We unveiled our winner at the 21st annual Morningstar Awards on Nov. 25.
Finalist: Stephen Burke and team, RBC Global Asset Management Inc.
The PH&N fixed income team at RBC Global Asset Management frequently makes our shortlist, and this year is no exception. Emphasising corporate and provincial bonds helped push PH&N Bond and PH&N Total Return Bond well ahead of the competition. To be sure, not everything went the team's way in 2015. Their decision to keep the portfolio's duration (a measure of interest rate sensitivity) a bit short relative to the FTSE TMX Canada Universe Index didn't help as interest rates fell. That their positioning didn't undo strength in credit and sector selection is a credit to PH&N's portfolio construction and risk-management system, which has helped limit the impact of mistakes. The team has continued to bolster the technology behind the system -- its proprietary software called BondLab -- demonstrating they're not resting on their laurels. In addition to building upon its technological advantages, PH&N boosted its human ones, adding three credit analysts this year.
Winner: Dan Janis, Thomas Goggins and Kisoo Park, Manulife Asset Management Ltd.
Morningstar places Manulife Strategic Income in the High Yield Fixed Income category, but its strategy makes it an odd fit for any category. Janis, Goggins and Park have the freedom to roam into asset-backed, investment-grade corporate, and developed and emerging market government bonds, in addition to high-yield issuers. The managers used their freedom well in 2015. They slashed their exposure to lower-rated bonds, cut exposure to emerging market debt, moved from cyclical sectors like energy to more-stable ones such as health care, and positioned the portfolio for Canadian dollar weakness -- moves that paid off handsomely this year. Savvy decisions like these are nothing new for these industry veterans -- Janis and Goggins have been with Manulife since the 1990s -- explaining their success over the long haul.
| Fund name | YTD | 1 Yr | 3 Yr | 5 Yr | ||
| Manulife Strategic Income Adv | 5.31 | 7.95 | 6.82 | 5.91 | ||
| PH&N Total Return Bond Sr D | 2.30 | 4.94 | 3.40 | 4.25 | ||
| PH&N Bond Sr D | 2.37 | 5.06 | 3.28 | 4.13 | ||
| Source: Morningstar. Data as of October 31, 2015 | ||||||
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