Blog: Cutting Through the Noise
Bradley's Brief - Q3 2012Print
Posted on October 25, 2012
By Scott Ronalds
This post should've been published two weeks ago, but I neglected to add it to my 'To Do List' this quarter. My bad. Without further ado, here's an excerpt from Bradley's Brief:
The third quarter was another good one. Stock markets were up and our clients continued to do well. When we meet with clients in this positive context, or see them on the street, we hear words like, “Just keep doing what you’re doing … I love the Income Fund … that Wil guy is awesome.”
While it’s gratifying to hear, I do worry about the expectations that are embedded in these compliments. After a period of strong returns, there is a tendency to accept it as a trend. But as we know, investors should never project anything that’s happened in the past as the trend for the future. Good long-term performance encompasses strong and weak periods.
I’m most uneasy with expectations around the Income Fund, which has had a particularly good run over the last 4 years. No one will be surprised to hear that I love the design of the fund and have great confidence in our manager, Connor, Clark & Lunn. Indeed, I expect them to continue using corporate bonds, high-yield securities and dividend-paying companies to generate returns well above government bond yields and GIC rates.
But … we have to keep in mind that the starting point for the next 5 years is quite different than it was in 2009, or even 2007. Interest rates are 2% lower, which means the expected return for bonds (currently 70% of the fund) is 2% lower. Real estate investment trusts (REITs) and dividend-paying stocks are more popular now and don’t offer the same recovery potential they did in 2009. So instead of the 7% per annum that the fund has achieved over the last 5 years, a reasonable expectation for the next five should be 3-5%. And with a good portion of the return coming from stocks, we should also expect bumps along the way (some quarters with negative returns).
Read Tom's full brief and the rest of our Quarterly Report here.