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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, July 05, 2018

With interest rates on the rise (at least in the U.S. – in Canada the doubts grow daily), one would think all fixed-income (FI) funds, including global corporate FI funds, would be in retreat. After all, when rates go up, the value of bonds – the primary asset in most FI funds – generally falls. That hasn’t been the case for the multi-year FundGrade A+® Award-winner Brandes Corporate Focus Bond Fund, despite being invested almost entirely (99.2%) in the U.S.

The fund shrugged off the latest Federal Reserve rate increase this March plus promises of more to come soon, to post a 1.2% return for the month of May 2018. One of the best long-term performers in the category, Brandes also boasts 5- and 10-year average annual compounded returns of 6.4% and 5.3%, respectively.

For Timothy M. Doyle, fixed-income portfolio manager with Brandes Investment Partners, in Milwaukee, WI, interest rate movements are largely irrelevant. “Interest rates are not part of our fundamentals,” says Doyle. “Everything here is done bottom-up.”

By that, Doyle means that his investment team will spend weeks or even months combing the financials of prospective investments without regard for where interest rates are going. “ There are a number of factors we consider when we are identifying opportunities, but not interest rates ,” Doyle adds. “Our main focus is on a company’s ability to generate cash flow throughout the economic cycle. We also look for strong tangible asset coverage.

“So, for example, if it’s an industrial company, does it have access to tangible plant infrastructure?” Doyle says. “If it’s a home builder, does it have real estate assets? We don’t really have an upside [in terms of higher bond coupons if a company does particularly well], so tangible assets give us protection on the downside if the issuer runs into trouble.”

“We’ll evaluate credit and if we like a company, we’ll look at the capital structure and the maturity spectrum, and analyze where we want to be,” Doyle adds. “Do we want secured or unsecured debt, or maybe junior subordinated? Where on the maturity spectrum? Demand has been strong for longer maturities – investors are trying to get some extra yields by going down in quality or stretching maturities (and insurers, for example, are always trying to match assets and liabilities) – so we’re finding more often than not that shorter maturities are more attractive.”

While the fund portfolio currently has a sizeable (16.9%) cash component as well as 17.2% in government Treasury bonds, and most other holdings are fairly short term (maturing in one to three years), all of which would bespeak a fairly defensive position, Doyle stresses again that this all has nothing to do with interest rates.

“It’s a defensive position, yes, but it’s not tied to rates,” Doyle says. “Firstly, that cash position is overstated because it includes a lot of issues that are about to expire, and the Treasurys are there because we’ve been having a hard time finding good opportunities. As for terms, after more than a decade of unprecedented fiscal stimulus from the Fed and central banks around the globe, the yield spread is as tight as it’s been in 25 years, without much volatility.

“We’ve been favoring shorter maturities because there’s a bit of value there, but we are playing defence,” Doyle adds. “We’re keeping a fair amount of dry powder and waiting for something to happen in the market. We believe the market is overdue for some volatility – everyone has become too complacent.

“Shorter maturities also give us more flexibility if conditions do change,” says Doyle. “shorter terms are more liquid, so it’s easier to sell and redeploy the cash.” And while he repeats that the fund’s selection processes are unrelated to interest rates, he acknowledges that “shorter terms hold up better than long terms in a rising rate environment.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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