Style
Our approach to fixed income management is conservative and recognizes the bond component’s role in reducing risk in a larger, balanced portfolio. There are two important elements in our investment approach:
- Duration management (duration is maintained within a narrow range of +/-0.5 years of the DEX Universe Bond Index)
- Trading (discussed below)
Process
The duration and term structure of the fixed income portfolio are based on our interest rate forecast. The most important variable in that forecast is the level of real interest rate returns, which is determined by our economic outlook for Canada and around the world. Recognizing the importance of the US economy to Canada, our economic forecast focuses considerable attention on the US outlook.
We also consider domestic and foreign supply and demand factors. Individual securities are then selected to meet the duration target, while also considering the quality of the issuer, the value of the security as determined by its yield spread in comparison to similar or benchmark securities, the expectation for change in yield spreads and liquidity.
Our bond trading strategy is designed to add value by making a series of short-term, low risk moves that have no effect on the duration of the portfolio. We use three different types of trades:
- Anomaly trades that attempt to identify securities that are trading at values that differ from historical relationships to other securities
- Yield curve trades that take advantage of differences in yields between bonds of different maturities and variances from normal levels
- Sector allocation trades that occur when the yields of bonds from different types of issuers vary from their normal levels
Risk Controls
We avoid taking unnecessary credit risk by only purchasing holdings of investment grade or higher. Within investment grade holdings, the fund has also set target ranges for specific credit ratings to help control risk. In addition, we stress liquidity, recognizing that the discounts offered for illiquid bonds often cancel out their long-term value. As a result, we do not sacrifice quality in order to increase the yield of the portfolio.