What are we looking for?
Multisector bond funds that have weathered interest-rate hikes.
On Wednesday, the Bank of Canada’s announcement to keep rates steady was a relief for bond investors, given the inverse relationship between interest rates and bond prices. For retail investors, it’s very likely that bond exposure is found through a mutual fund or ETF, since buying and managing a portfolio of bonds is likely out of reach for many, given the opaque nature of bond markets.
Today we look at the newly formed category of multisector bond funds, as defined by the Canadian Investment Funds Standards Committee (www.cifsc.org). These funds invest broadly across multiple fixed-income supersectors (government, corporate, agency, securitized and high-yield debt) and have stated mandates that allow for tactical changes between sectors. When contrasting multisector bond funds against more traditional fixed-income funds (like Canadian long-term fixed-income funds) that are tied to one bond sector, the flexibility of these types of funds allows the manager to navigate complex interest-rate environments, hopefully to the benefit of the investor.
To help investors find reasonable picks within this new fund category, I used Morningstar Direct to screen for those that have a Morningstar Rating for Funds of four stars or more. Recall that this rating is an objective, backward-looking view of returns against peers, after the effect of fees and adjusting for risk. Our data show that although the star ratings are backward-looking, funds that have received five stars as a group outperform those that have received four stars, three stars, etc. in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future. To ensure utility for readers of this column, only fee-based and DIY mutual funds (both of which do not include advice fees in the MER), alongside ETFs, were considered in the search.
What we found
The results of the search are shown in the table accompanying this article and include each fund’s MER, Morningstar rating, trailing returns and inception date. Also included is a snapshot of the funds’ average credit quality and effective duration, where available. The table is sorted first by the rating and then by YTD returns.
This article does not constitute financial advice. It is always recommended to conduct one’s own independent research before buying or selling any security listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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