Playing defence as bonds rally
Jeff Herold and Maria Berlettano, portfolio managers at J. Zechner Associates, believe the bond market correction has passed its halfway point.
The NexGen Canadian Bond Fund is already positioned defensively, but the managers are looking to get even more defensive as bond prices continue rebounding off the lows that followed U.S. Federal Reserve Chairman Ben Bernanke’s tapering talk in May.
“We don’t expect yields to rise as much as they have in the past few months, but we do think they can move higher. We don’t think this bear market is over yet,” Herold said. “But bear markets in bonds don’t last very long. With the recent rise in yields, bonds have simply become better value.”
The managers were not surprised when the Fed did not announce plans to reduce its asset-purchase program at the September FOMC meeting, but they still believe tapering could begin by the end of 2013, although weak U.S. economic data could push the timing until early 2014.
The fund has a cash posi t i on of about 8% and a 53% weighting in corporate bonds, versus 29% for the Canadian benchmark DEX Universe Bond Index. The managers highlighted the healthy level of corporate issuance in Canada, which is up about 27% versus 2012 at more than $82-billion so far this year.
They are also investing in two-year bonds and floatingrate notes (FRNs).
“With FRNs, you can pick up yield without adding duration risk, and as rates reset, you capture them at higher levels,” Berlettano said.
The managers, who oversee $1.4-billion in fixed-income mandates, also have significant exposure to BBBrated bonds at 18% of the portfolio, compared with 9% for the DEX.
“With the economy growing, it’s a good stage in the credit cycle,” Herold said.
“We don’t anticipate a recession, so we’re perfectly happy with solid BBB-rated household names.”