Interest rates are sinking again in response to the coronavirus scare, but investors keep buying into bonds. In fact, despite the strong stock market last year, traders placed more in fixed-income funds than in equity funds in 2019.
According to figures from the Investment Funds Institute of Canada, investors redeemed a net $13.8-billion in equity mutual funds during 2019. Net purchases of bond funds totalled $18.9-billion, a difference of $32.7-billion.
On the ETF side, investors were a little more positive about stocks, investing a net $10.2-billion in equity-based exchange-traded funds. But they still preferred bonds, which drew $12.1-billion in new money. As of the end of last year, 32 per cent of all ETF assets were in bond funds.
At first glance, it’s difficult to understand last year’s aversion to the stock market. North American indexes hit new records in 2019 and into February as the long bull market continued its record run.
But now, fear has overtaken greed in the minds of many people. They’re worried that stocks have become too expensive, that U.S. President Donald Trump’s tariff wars are undermining world trade, that a new recession is looming – but most of all, they’re concerned about the economic impact of the virus. Safety has suddenly become the top priority.
In this context, it’s easy to understand why we’re seeing the launch of more fixed-income funds. One that recently came to my attention is of special interest to investors looking for a bond ETF that offers a decent yield and, as a bonus, has a socially responsible mandate.
It’s called the Harvest US Investment Grade Bond Plus ETF (HUIB). It is actively managed by Brad Komenda, senior vice-president and portfolio manager at Amundi Pioneer Asset Management USA Inc. That company is one of the leaders in the ESG space (environmental, social and governance) and has won many awards for socially responsible investing.
The fund invests in a portfolio of American investment-grade corporate bonds, which offer higher rates than government issues. The returns are hedged back to Canadian dollars, eliminating the currency risk. The average credit rating is BBB-plus.
The fund started trading on Jan. 15 at $20 a unit. It closed on March 4 at $20.52. Distributions are paid monthly, with the first payout of 5.4 cents a unit delivered on Feb. 27. If that rate is maintained, the 12-month forward yield would be 3.16 per cent. The management fee is 0.48 per cent.
This is a very small fund, with assets of slightly more than $10-million. Because its portfolio consists of lower-quality bonds (albeit investment grade), it should be seen as higher risk in the event of a recession.
This fund is too new to make any judgment about its performance in relation to competitors. But it’s worth a look if you’re interested in a U.S. bond fund with an above-average yield. It is thinly traded, so if you’re interested, place a limit order and be patient.
Gordon Pape