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Inside the Market How RBC’s head of global fixed income is navigating the bond market in today’s low interest rate environment

Dagmara Fijalkowski doesn’t need the certainty of a recession to plan for it in her portfolios.

“We know that when recession risks are rising you should prepare for such an eventuality. It’s like when you’re leaving home and you see dark clouds and hear thunder on the horizon, it would be wise to bring your umbrella,” says Ms. Fijalkowski, senior portfolio manager and head of global fixed income and currencies at RBC Global Asset Management. Her team manages about $110-billion in fixed income.

The flagship $22-billion RBC Bond Fund returned 9.5 per cent after fees over the past year as of Aug. 31, and had an average annual return of 4.1 per cent over the past five years. Both returns are after fees of 0.5 per cent for the fund’s Series F, which is a class of funds generally available for fee-based advisers.

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The $10-billion RBC Global Bond Fund, which invests primarily in global government debt on a currency-hedged basis, saw a return of 11 per cent over the past year and a five-year average annual return of 4.3 per cent, after fees of 0.73 per cent for the Series F version of the fund.

The recent geographic allocations in the RBC Global Bond Fund are about a third in debt issued in dollar currencies, or “dollar-block debt,” in places such as the United States, Canada and Australia; 46 per cent in European debt; 11 per cent Japanese debt; and about 5 per cent emerging-market debt.

The one-year return for dollar-block debt as of Aug. 19 was 9.7 per cent, according to RBC, and 13.9 per cent for European debt, 8.7 per cent for Japanese debt and 12.2 per cent for emerging-markets debt.

The Globe and Mail recently spoke to Ms. Fijalkowski about her investing style, how she’s preparing her funds for a possible recession and how to navigate the bond market in today’s low interest-rate environment.

Describe your investing style.

We are long-term investors, not traders, so the time horizon for the majority of the decisions we’re making is two to three years. We tend to invest in a countercyclical way. We increase our risk when compensation is generous and decrease when value is negligible. We hedge our currency exposure in order to reduce the volatility of the fund by protecting against changes in currency exchange rates. We take currency risk only when we expect appreciation of currencies versus the Canadian dollar.

What concerns are you hearing from investors today?

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Investors are mostly concerned about the rising risk of a recession. The expectations of slower economic growth as the business cycle ages and the impact of a trade war between the U.S. and China are also concerning. When two titans are at war, everybody is affected, leading to concern about falling global manufacturing activity. The inverted yield curve, which in the past has been an indicator of a recession, is also a concern.

How are you preparing your funds for a possible recession?

We are trying to be in a position to take advantage of volatility in the market to enter into attractive longer-term positions. Returns on fixed income have been generous so far this year and we have been selling some of our larger positions. For instance, credit and high-yield bonds performed very well alongside long-duration bonds. Long provincial bonds in particular have delivered extraordinary returns so far this year. We have been mostly reducing risk in these areas by taking profit in many of these positions.

How should investors navigate the bond market in this low interest rate environment?

Generally, bond investors are very happy as interest rates decline because as rates decline, they are seeing capital gains. Fixed-income investors have been very well compensated this year. Fixed income isn’t something investors should attempt to buy individually, on a security-by-security basis, especially if we’re talking about [non-government-issued debt such as corporate bonds] and especially at this stage in the cycle. You need to do your homework. Right now the market is quite indiscriminate about credit quality.

Please share your thoughts on the Canadian dollar and its exchange rate related to the U.S. dollar.

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The Canadian dollar is quite cheap against the U.S. dollar, from a long-term valuation standpoint. The further deterioration of economic growth globally could cause the Canadian dollar to become even cheaper. That’s a currency-only perspective. Because we are portfolio managers, we always look at the relationship between all securities in our portfolio.

This interview has been edited and condensed.

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