The fund invests in a diversified portfolio of short-term high-yield bonds,
senior bank loans, and investment-grade bonds. The underlying yield of the
portfolio is listed at 4.3%, which is well above the 2.9% offered by the
S&P/TSX 60 Index.
But overall risk is also higher because the fund is taking on more credit
risk. It is also more volatile than other short-term bond funds, with an
average 3-year standard deviation of 4.2%, nearly double that of most of
its peers. The fund is consequently susceptible to larger swings. For
example, between mid-2015 and early 2016, when crude oil sold off sharply,
the fund fell more than 5%, but then rebounded strongly, ending 2016 up
more than 5%.
The target mix is roughly 50% short-term high-yield bonds and 50% senior
loans, a mix that dramatically reduces interest rate sensitivity. Credit
risk is an issue; however, bank loans sit very high in a company’s capital
structure, helping mitigate that risk. To protect against default in the
high-yield holdings, the managers do a significant amount of credit
analysis to fully understand a company’s overall debt situation.
Returns have been modest in absolute terms, but the fund has consistently
produced solid returns. Its 3-year average annual compounded rate of return
ending Feb. 28 was 4.0% for the Series F units, well above the category
average of 2.6% for the period.
The fund pays a monthly distribution that is adjusted based on the yield
outlook. Distributions are currently $0.03 monthly, for an annualized yield
of 4%. MER is a relatively steep 1.2%, but the costs have thus far been
more than offset by the higher return.
The fund isn’t for everyone and is not a core holding. But those
comfortable taking on a bit more risk can earn a higher return and shorten
the duration of their fixed-income sleeve by adding an appropriate
allocation of this fund to their otherwise well-diversified portfolio.
NCM Short Term Income Fund
Miscellaneous – Income and Real Property
Bottom-up Credit Analysis
Bill Holy, Owen Morgan
1.21% (Series F)
NRP1100 (Series F)
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products. He is also the publisher
Dave Paterson’s Top Funds Report,
offering regular commentary and in-depth analysis of Canada’s top
investment funds. He uses a unique analytical approach to identify
funds with strong, risk-adjusted returns, and regularly publishes his
insights and analyses in Fund Library.
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only and is not intended as personalized investment advice.