Fund in Focus: First Asset Canadian Convertible Bond Fund

Holds up on the downside

Convertible bonds are a very interesting asset class with characteristics of both bonds and stocks, depending on whether the company’s share price is above the bond’s conversion price (behaves like a stock) or below (behaves like a bond). Convertibles are considered “high yield” because they do not sit as high on the capital structure of a firm as traditional bonds. For investors, there are only a few options available to access the convertible bond market, including a handful of mutual funds and a couple of ETFs. First Asset Canadian Convertible Bond Fund is one of the more attractive mutual fund options.

The fund invests primarily in Canadian convertible bonds but may invest up to 30% in non-Canadian issues. First Asset portfolio manager Lee Goldman looks for bonds issued by companies that have strong balance sheets that he believes can withstand an economic downturn.

The fund is well diversified, holding more than 50 names, with the top 10 making up roughly 35% of assets. Real estate and REITs make up the largest sector exposure, at roughly a quarter of the fund, while financials and industrials comprise about 30% of the fund combined.

Portfolio turnover has been very modest, averaging approximately 20% per year. However, the manager may use periods of volatility as an opportunity to improve performance, as occurred in 2017, when portfolio turnover was more than 50%.

The fund has recently outperformed other convertible bond funds as well as the broader high-yield peer group. Its 5-year average annual compounded rate of return to July 31 came in at 3.3%, trailing the index, but beating its peers. For the past 12 months, it has substantially outpaced the peer group, gaining 4.8%.

With a 3-year average standard deviation of 5, volatility has been slightly higher than the broader high-yield market, but the downside protection has been significantly better. It has shown positive correlation to Canadian equities, but negative to the broader Canadian bond market.

I would expect this fund to perform much like a conservative dividend fund but with better downside protection. The fund is not suitable for everyone and can be tricky to use in a portfolio, given its hybrid nature.

I see this fund playing a role similar to a high-yield bond fund in a portfolio, offering higher yields than traditional fixed income, less interest rate sensitivity, and higher overall upside potential.

First Asset Canadian Convertible Bond Fund
Fund company: First Asset Investment Management
Fund type: High Yield Fixed Income
FundGrade: B (July)
Style: Fundamental Credit Analysis
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Fair
Manager: Lee Goldman since November 2009
MER: 2.47%
Fund code: FAF5703 (Front-end load)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with 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. This article is for information purposes only and is not intended as personalized investment advice.