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Fund manager offers new approach to bond funds

Per cent blocks.

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The man behind some of the most successful bond ETFs of the past few years says investors need a new approach to fixed income.

Forget bond indexing for the years ahead, says Som Seif, president and CEO of Purpose Investments Inc. Instead, investors should look to an actively managed approach that blends government and corporate bonds, high-yield and cash. As it happens, Purpose offers just such a product, the Purpose Total Return Bond Fund, which has a 66-per-cent weighting to high yield, a 31 per cent weighting in corporate bonds and next to nothing in government debt.

Seif formerly ran Claymore Investments, which he sold to BlackRock Canada two years ago. Two of the best products Claymore introduced were laddered corporate and government bond ETFs that offered a cheap, convenient alternative to building a ladder using individual bonds. The two funds – the corporate fund uses the ticker CBO and the government fund uses CLF – have attracted close to $3-billion in assets, which is to say they've been a home run.

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Seif acknowledges that bond ETFs like these have done well for investors, but he said it's because they benefited from a long period of falling interest rates. In the 10 years to come, he argues, interest rates will rise and thus put pressure on conventional bond funds that try to reflect the broad fixed income market.

The tactical approach used by PBD currently puts a big emphasis on high-yield bonds, which are more sensitive to the economic cycle than changes in interest rates, and corporate bonds, which are more resilient than government bonds in times of rising rates. The fund can hold cash at times when bonds of all types are out of favour.

Indexing purists may not have much time for this concept, but Seif has anticipated what is likely to be their chief objection. That would be cost, which is the downfall of most actively managed bond mutual funds. The management fee for PBD is 0.45 per cent and the all-in management expense ratio should come in below 0.5 per cent. This is more expensive than the likes of CLF and CBO, but still a reasonable cost in today's investing world.

There's a case to be made for a fund like PBD as a complement to basic index-tracking bond ETFs, or even a replacement. What this brand new fund lacks is a track record. That's why I'm putting PBD in a watchlist, along with CLF and CBO. The next time interest rates kick higher, I'll report back on how they all fare.

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