Income Fund

March 31, 2025

Market Context

• The Canadian bond market rose 2.0% in the quarter (income and capital appreciation).
  
• Bond yields declined, with short-term yields experiencing the biggest moves. The benchmark 10-year Government of Canada yield fell from 3.2% to 3.0%.
  
• Canadian stocks rose 1.5%. The gold sector was a notable area of strength while healthcare and technology stocks saw the greatest declines.
  

Portfolio Specifics

• The bond component of the portfolio, which constitutes 76%, performed well. With economic activity slowing in Canada and a high degree of uncertainty surrounding tariffs, yields fell across the maturity spectrum (as a reminder, when yields fall, bond prices rise). The Bank of Canada cut its key policy rate twice, leading to greater declines in short- and mid-term yields compared to long-term yields. This benefited our holdings with maturities less than 10 years the most (73% of our investments).
  
• The growth backdrop in Canada has weakened, which will likely lead to further government stimulus. That said, the Bank of Canada has been one of the most active central banks over the last year, and has limited ability to cut rates significantly further. Our manager, Connor, Clark & Lunn, anticipates that long-term yields will come down more than short-term rates and has structured the portfolio with a longer duration accordingly.
  
• Corporate bonds are an important part of the portfolio, though our weighting remains lower than usual given the current economic climate. With consumer confidence waning and business sentiment at a low, the likelihood of a recession in Canada has increased in CC&L’s view. As a result, our focus is on high-quality bonds issued by companies with strong balance sheets. These include telecoms, REITs anchored by grocers, and top-tier banks, where lower interest rates suggest manageable mortgage renewals while loan growth stabilizes.
  
• The fund’s equities (24% of the portfolio) were positive contributors but lagged behind the overall market. Bright spots included gold miner Agnico Eagle Mines and consumer staples George Weston and Loblaw Companies, which delivered strong results. However, two of our power generators, Capital Power and TransAlta, saw significant declines amid a broad selloff in the sector triggered by concerns that AI-related businesses will require less power than originally anticipated.
  
• The fund paid a distribution of $0.07/unit at the end of March.
  

Positioning

• With economic activity slowing and business and investor sentiment souring, our focus is on high-quality bonds and stocks with a defensive tilt.
  
• Stocks make up 24% of the fund and remain an important source of diversification.
  

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