Income Fund

September 30, 2018

Market Context

  • The Canadian bond market fell 1.0% in the quarter (interest and capital appreciation).
  • Bond yields ended the quarter higher, with the 10-year Government of Canada yield rising to 2.4% (from 2.2%).
  • The Canadian stock market declined 0.6% on weakness in energy stocks.

Portfolio Specifics

  • Bonds comprise 76% of the fund. This component detracted from performance in the quarter as interest rates rose (remember: when rates rise, bond prices fall).
  • Economic fundamentals remain strong, and while global growth has softened a little, governments around the world continue to tighten financial conditions. Bond yields in Canada rose across all maturities, which hurt the fund’s fixed income holdings.
  • The manager, Connor, Clark & Lunn, shifted the portfolio’s government holdings. In a defensive move, some provincial bond investments were trimmed and Canada mortgage bonds (fully guaranteed by the federal government) were purchased. That said, provincials still represent an important area of investment, making up 28% of the fund, with a focus on the provinces of Ontario and Alberta.
  • CC&L’s outlook for bonds continues to be cautious. While we’re likely in the later stages of the business cycle, there’s nothing to indicate that the end is imminent. Business investment is picking up, inflation is at a healthy level, and policymakers in Canada and the U.S. have hinted at 2-3 more interest rate hikes over the coming year. It all means that bond prices remain vulnerable. Our focus continues to be on higher-quality issuers. The fund’s corporate bond exposure remains lower than normal, with a focus on defensive industries such as utilities, banks and REITs.
  • Stocks make up 24% of the fund. Sectors of focus include financial services, industrial goods, energy and utilities. This part of the portfolio has been an important contributor to performance this year. In particular, canadian apartment properties reit, tmx group, and snc-lavalin group have been strong performers.
  • The fund’s equity strategy is focused on companies that are growing their dividend (as opposed to high dividend payers), as well as stocks that will benefit from continued growth in business and infrastructure spending.
  • The fund paid a distribution of $0.045/unit at the end of September. Its pre-fee yield is 3.1%.

Positioning

  • The fund’s bond strategy remains cautious. The focus is on higher-quality securities that also have good liquidity (i.e., they can easily be bought or sold).
  • Stocks remain an important source of diversification and yield. The manager has a current bias towards larger cap, lower volatility stocks.