Last updated: Apr-18-2019

4/20/2019 6:29:25 AM
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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  | Monday, February 04, 2019

Given the way the stock markets performed in 2018, it’s perhaps not surprising that the Canadian fixed-income category vaulted from near the bottom of the performance rankings to eighth (among 55 fund categories), and that was with an average one-year return of just -0.3%. Canadian equities, meanwhile, plummeted to 48th for the year with a loss of 10.5% on the year. Among the top performers in the Canadian fixed-income category is the Horizons Active Canadian Bond ETF (TSX: HAD), which just garnered a FundGrade A+ Award for 2018.

The volatile nature of the equity markets, as amply demonstrated in 2018, is the big reason why a balance between fixed income and equity holdings is always recommended. And while a -0.3% return is hardly worth crowing about, it sure beats -10.5%, besides which, those are averages and there are many fixed-income funds with more positive returns on the year.

The Horizons Active Canadian Bond ETF (TSX: HAD) has been one of the most consistent – and interesting – outperformers in the Canadian fixed-income category over the past several years. It generated a top-flight 2.5% return in 2018, as well as 3- and 5-year average annual compounded returns of 2.1% and 3.4% respectively (compared with the category averages of 0.6% and 1.9% respectively).

But wait a sec – aren’t ETFs almost by definition supposed to be passively managed replicas of an underlying index? What does that “active” signify?

Christopher Laurie , vice president and senior portfolio manager at Fiera Capital Corp. in Toronto, and portfolio manager of the Horizons fund, explains that the fund’s holdings are indeed based on the FTSE Canada Universe Bond Index (like most Canadian fixed-income funds) and include only investment-grade (BBB or better) securities. But beyond that, the two baskets can vary over time.

“What makes us different is that we will make duration or interest rate anticipation calls,” says Laurie. “This drives about two thirds of our added value. For example, the [benchmark] duration is now 7.5 years, but we can go as high as 10.5 or as low as 4.5, although there are limits on the maximum weightings of federal, provincial and corporate debt – what I call ‘sectors.’

“We use two approaches to doing this,” Laurie adds. “On a longer-term view, we take a top-down macro approach, looking at the fundamentals, but short-term it’s done with technical analysis. So, for example, if we feel interest rates are going to rise over the long term, we can move to shorter durations, but on the day-to-day side we may see other opportunities.

“Sector spreads generate about another 10%-15% of our added value,” Laurie says. “I should add we’re not credit pickers, we look more at corporate allocations, which could be 30% or 35% or 40%, depending on where the spread is going. But this is a top-down allocation as opposed to picking individual companies or issues.”

As for where interest rates are headed now – how far and how fast – Laurie sees some softening of the upward trajectory that saw Canada’s bank rate increase five times over the past 18 months. “We see Canadian as well as U.S. rates as being range-bound over the next year,” he says. “For example, the Canadian 30-year rate is now 225 basis points, and we see the range as between 210 and 260 basis points. And we see the U.S. 10-year range as 250 to 300 basis points.

“My view is that we will see Canadian and U.S. GDP slowing in 2019,” Laurie suggests. “The Canadian economy grew 2% in 2018, and that will slow to 1.9%, while the U.S. was 3% in 2018, and that will slow to 2.5% in 2019. And, there is a small – very small – possibility of recession in 2020.

“Trade and tariffs are the biggest wild card,” Laurie adds. “We’re seeing global growth slowing to 3.5%, and that’s the slowest it’s been in a few years. Brexit is another wild card, although it won’t have as much impact as trade and tariffs. So while there was talk in 2018 about several more rate hikes this year, both the Fed and the Bank of Canada have become more dovish the last couple of months, and we’ll probably see no more than two hikes. But of course, it’s all data-dependent.”

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

Notes and Disclaimers

© 2019 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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