Income Fund

December 31, 2018

Market Context

  • The Canadian bond market gained 1.4% in 2018 (interest and capital appreciation).
  • Government bond yields ended the year in line with where they started, while corporate yields were slightly higher. The 10-year Government of Canada yield finished the year at 2.0%, but this masks the volatility it experienced in 2018, peaking at 2.6% in October.
  • The Canadian stock market declined 8.9%. Energy stocks were an area of weakness.

Portfolio Specifics

  • The fund declined 1.3% in 2018. Its bond holdings provided modestly positive returns while the stock component weighed on performance.
  • A big theme in the fund during the year was a reduction in its overall level of risk. This was achieved through: (1) a focus on higher quality corporate bonds, and (2) a shift towards more Government of Canada bonds.
  • Corporate bonds play a reduced role in the fund, making up 20% of the portfolio. The yield advantage of owning these securities over safer government bonds has subsided. The manager, Connor, Clark & Lunn (CC&L), feels bondholders aren’t being adequately compensated for the additional risks they’re taking. This is especially true as interest rates start to rise and the risk of default increases. Instead of owning a large amount of corporates, the manager’s focus is now on government-issued bonds.
  • The move towards safety proved prescient in the second half of the year. Stock market volatility picked up as concerns arose around global economic growth. Investors shifted from stocks and corporate bonds to safer investments like government bonds. The result was a sharp fall in yields for federal-issued bonds (when bond yields fall, bond prices and returns increase).
  • Stocks account for 23% of the fund. Sectors of focus include financial services, industrials, energy and utilities. This component of the fund declined in 2018, but not as significantly as the broad Canadian market. The fund isn’t as exposed to commodity-driven sectors (energy and materials), which experienced a rocky year.
  • 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 distributions totaling $0.28/unit in 2018.

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.