Go global for better yield
The way Daniel Solomon, chief investment officer at mutual fund manager NEI Investments sees it, Canadian fixed income investors have a choice.
They can stay local and participate in a world of continued low interest rates, of continued lower spreads, of limited high yield bonds and of continued dominance by government and financial institution borrowers. Or they can get aboard the global bond market where rates are higher, where there are more varied types of fixed income securities and where there is more possibility for higher returns.
And when you offer to clients an actively managed global total return bond fund, the answer as to what is the best course of action is clear.
“There is a way to get better fixed income returns on a risk return basis, than staying local. You don’t have to be constrained by mediocre returns,” Solomon said Tuesday, following a presentation in Toronto by Pascal Dubreuil, senior portfolio manager of the one-year-old Canadian retail fund. Dubreuil is London-based where he works with Amundi Asset Management, a firm with US$1-trillion of assets under management, of which US$8-billion is invested using the same strategy as employed by the Canadian fund.
As with global equity markets, not all global fixed income markets are the same: active management of both securities and the currency is required to find the best opportunities. Over the past year, the NEI fund, which has about $220-million in assets, has slightly outperformed the benchmark (the Barclays Global Aggregate Total Return Hedged US$.)
That slight outperformance arose from a portfolio that is significantly different from the benchmark. As of the end of September, the fund’s average credit rating is lower (A- versus AA); the duration, a measure of the change in price relative to a change in yield, is lower (2.06 years versus 6.28 years); and the country allocation is considerably different (with a greater weight to Italy, Portugal, France and U.K and less weight to the U.S. and Japan.) Part of Amundi’s Italian exposure is through assetbacked bonds.
Those portfolio characteristics have been in place for the past six months. “But what you see today may not be here tomorrow. “It’s very active management,” said Dubreuil.
Over the six years that Amundi has operated the global strategy, the outperformance, according to a handout, is about 600 basis points.
Amundi’s Dubreuil said the outperformance has arisen because “we managed to have a balanced allocation between the different asset classes,” with particular attention paid to three factors in performance (the rates on government bonds, credit and currency.)
In other words, investors benefited because the manager could use “the three engines on a very wide universe of investments. But we don’t need to be right in all of the things we do. What matters is the global allocation,” said Dubreuil, who is on a cross-country tour that wraps up next week in Victoria B.C.
While rates are low in Canada, fixed income returns have been rather impressive: according to the FTSE TMX indices, the universe bond index is up by 7.15% so far this year. But be careful, warned Solomon. “Next year is likely to look much different with yields starting to normalize but at higher levels.”