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Fixed Income & Balanced Strategies

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Fixed Income & Balanced Strategies – Q1 2021

Investors entered the new year concerned with medical, economic and political challenges. In the US, the Democrats won control of the Senate, paving the way for the new administration to pass a larger stimulus package. Fiscal policy relief did not immediately allay investor concerns over increased COVID-19 cases and the impact of renewed lockdown measures. Views changed rapidly, however, as the vaccine rollout gathered pace and the prospect for an economic reopening crystallized. Economists quickly altered forecasts predicting a stronger recovery and higher inflation. Reassurance from the Federal Reserve that short rates would remain near zero, coupled with government support for the economy proved good news for equity markets but less so for bond markets. The US government bond market recorded one of its worst quarterly performances as mid and longterm yields moved sharply higher.  

The Canadian economy proved more resilient than anticipated. Consumers and businesses adapted to Covid restrictions, and housing market activity surged beyond expectations. Improving foreign demand and higher commodity prices brightened the prospects for exports and business investment. Inflation fears pushed the Canadian government bond market returns into negative territory as mid and longterm yields moved sharply higher. Investment grade corporate bonds benefitted from modest spread tightening in the quarter but not enough to overcome the significant impact of rising government bond yields. Despite rebounds, levels of economic activity and employment remain well below pre-Covid levels. Vaccinations are being administered aggressively in the US and UK but are lagging in Canada and parts of Europe. 

Pembroke Corporate Bond Fund 

The Corporate Bond Fund posted a positive return during the quarter, outpacing the benchmark FTSE Canada All Corporate Bond Index which declined during the quarter. The outperformance is primarily attributable to the continued recovery of highyield issuers that were negatively impacted by the pandemic. Issuers such as Hertz, AMC Entertainment, American Airlines, Bombardier, and Occidental Petroleum benefited from the positive news of the vaccine which has given hope that there soon will be a reopening of the economy and a return to travel. The fund is well positioned with a yield of 3.5% and a duration of 3.6 years, and just over 21% in floating rate notes. The fund will continue to reduce duration by opportunistically trimming mid and longterm issues as they reach full valuation and reinvest in attractive issues or floating rate instruments to provide further protection against rising rates.  

Pembroke Canadian Bond Fund 

The Canadian Bond Fund declined during the quarter but by less than the benchmark FTSE Canada Universe Bond Index. The fund benefited from shorter than index duration as well as its allocation to floating rate issues. The portfolio had a yield of 1.8% and a duration of 6.0 years at the end of the quarter. This compares favourably to the index yield of 1.7% and the markets duration of 8.8 years.   

Dividend/Balanced Fund Commentary 

Pembroke’s balanced portfolio, the Pembroke Canadian Balanced Fundposted positive returns in the first quarter of 2021. Performance was driven by gains in the equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund, which were partially offset by declines in the fixed income portion of the fund, represented by the Pembroke Canadian Bond Fund. 

Equity returns of the fund were buoyed by the development of effective COVID-19 vaccines and the continuation of decisive fiscal and monetary measures designed to counter the fallout from COVID-19. Fixed income returns of the fund were weighed down by the challenges of rising interest rates on bond prices. 

Income in the balanced fund is generated from a combination of dividends and interest. The equity portion of the fund has a current annualized gross yield of 2.6%, while the fixed income segment of the fund is primarily invested in securities rated “A+” that, on average, have a collective yield to maturity of 1.8% and an adjusted portfolio duration of six years. Minor changes to the asset mix of Pembroke’s balanced mandates were made through the year, with approximately 25.6% of the portfolio invested in fixed income securities as of March 31, 2021. 

Global Balanced Fund Commentary 

The Pembroke Global Balanced Fund is a fund of funds that invests primarily in Pembroke-managed equity and bond funds, externally managed active funds, and externally managed passive funds and exchange-traded-funds (ETFs). During the first quarter, the fund gained in both absolute terms and relative to its custom benchmark (30% FTSE Canadian Universe Bond Index, 45% MSCI All-Country World (CAD) Index, and 25% S&P TSX Composite Index).  

During the quarter, the fund’s active Canadian growth equity holdings made a positive contribution as did the Pembroke Corporate Bond Fund. All three of the passive equity ETFs also made positive contributions as did the Guardian Capital Fundamental Global Equity strategy. The fund’s position in the iShares gold bullion ETFthe Pembroke International growth Fund, the Pembroke Canadian Bond Fund, and the Lysander-Canso Bond Fund made negative contributions.   

The fund is diversified by asset class, by region, by size (small cap and large cap), and by fund type (active and passive). At the end of the quarter the fund had an approximately 67% allocation to global equities, approximately 29% allocation to corporate and sovereign bonds and cash, and approximately 4.5% to gold bullion ETF. The fixed income performance benefitted from the continued strength of the Pembroke Corporate Bond Fund, although we continued to reduce the weight in this strategy allocating additional weight to gold and the LysanderCanso Bond Fund which invests in investment grade corporate bonds. 

 

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Disclaimer

This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.