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Number Cruncher

Real-return bond funds: darlings of diversification Add to ...

What are we looking for?

With the rising price of gasoline and food this year, let’s see how Canadian inflation-protected fixed-income funds are faring.

These offerings provide a return and principal adjusted for inflation. They must be 90-per-cent invested in real-return bonds and may own some foreign securities, provided the currency exposure is hedged back to Canadian dollars.

The screen

We looked at the year-to-date returns to Aug. 3. We excluded duplicate versions of these offerings, and those only sold as part of a portfolio of funds.

What did we find?

The big three gainers were low-fee exchange-traded funds (ETFs) or mutual funds. Low fees help investors because higher charges can eat away at those precious returns.

The iShares DEX Real Return Bond ETF rose 10.1 per cent; the PH&N Inflation-Linked Bond fund gained 10 per cent and the BMO Real Return Bond ETF was up 9.8 per cent. Those are nice gains compared with the red ink being shed by the Canadian stock market during this period.

These returns are also a reminder that it pays to diversify your portfolio. “Real-return bonds have done very well this year as inflation expectations have increased significantly,” said Oliver McMahon, director of product management for iShares ETFs at BlackRock Canada.

The consumer price index (CPI), a measure of inflation, rose 3.1 per cent in June from a year earlier, compared with 2.3 per cent in January, Mr. McMahon said.

“The Bank of Canada is keeping rates low to stimulate the economy, while in stronger economic times, rates would be increased to reduce inflation,” he said.

“Investors are betting that the fragile economic conditions will prevent Bank of Canada Governor Mark Carney from moving rates as high as he would otherwise like, and thus, inflation may remain higher than wanted for some time.”

The price of real-return bonds got a boost in July because positive Canadian economic data for jobs and foreign trade pushed inflationary expectations higher, he suggested.

Bond prices and yields move in opposite directions. The performance of inflation-linked bonds has been driven by “declines in real yield [after inflation]to all-time historic lows in Canada” for long-term bonds, said William John, a portfolio manager at Phillips Hager & North Investment Management.

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