Income Fund

December 31, 2021

Market Context

  • The Canadian bond market fell 2.5% in 2021 (interest less capital depreciation).
  • Interest rates rose during the year, with the 10-year Government of Canada bond yield rising from 0.7% to 1.4%.
  • Canadian stocks gained 25.1%. Energy and financial stocks were areas of strength.

Portfolio Specifics

  • The fund rose 4.0% in 2021. Stock holdings, which comprise 27% of the portfolio, provided strong returns, gaining over 20% in aggregate, while the fixed income component (73% of the fund) declined in the year.
  • Bonds, in general, had a challenging year as interest rates increased (when rates rise, bond prices fall). Rates rose across the maturity spectrum as policymakers signaled an end to supportive measures in light of an improving economy. That said, the fund’s fixed income investments fared better than the market as a whole.
  • The economic recovery also meant an increase in inflation expectations which contributed to the rise in interest rates. The fund’s investments in Canadian Real Return bonds benefited as their values increase with inflation.
  • Our manager (Connor, Clark & Lunn) feels that policymakers have laid the groundwork for a period of higher growth and inflation, with some bumps along the way until the pandemic fully abates. In general, businesses have adapted and consumers have continued to spend. Moreover, Canadians are in a better financial position as their assets (homes and investments) have increased faster than debt. Hence, the portfolio’s continued preference for corporate and provincial bonds.
  • As for the fund’s equity investments, financial and real estate stocks had a bumper year. These industries saw their fortunes turn after a tough 2020. Two of our largest holdings, Royal Bank and TD Bank, gained more than 30%. In real estate, Summit Industrial gained over 70% and Granite REIT rose 35%. By contrast, renewable stocks Brookfield Renewable and Boralex fell over 15%. CC&L sees long-term potential in these businesses as demand for renewable energy continues to increase.
  • Stock holdings are focused on companies that benefit from economic growth but have defensive traits. Banks, insurers, REITs, and telcos remain key areas of interest.
  • The fund paid distributions totaling $0.27/unit in 2021.

Positioning

  • Our manager believes the world economy is on a strong growth path, despite setbacks due to the pandemic’s most recent wave. This supports higher weightings in provincial and corporate bonds, including high-yield debt
  • Stocks make up 27% of the fund and remain an important source of diversification and yield. The manager has a current bias towards high-quality large cap stocks.

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