Fixed Income & Balanced Strategies

Fixed Income & Balanced Strategies – Q2 2020

Canadian Bond Strategies – Q1 Portfolio Commentary

Markets came roaring back in spectacular fashion from their pandemic-induced first quarter selloff. This performance was helped by massive government assistance and central bank actions. The US Federal Reserve has implemented a number of “funding, credit, liquidity, and loan facilities.” These include the direct purchase of corporate bonds and related ETFs in both the primary and secondary markets. The Bank of Canada has implemented similar programs, on a smaller scale.

Overall, credit spreads narrowed, especially in those sectors least affected by the pandemic. As a result, corporate bonds outperformed Canada bonds by a wide margin with a return of 8.1% versus 2.3%. This spread tightening had the greatest price impact on long-term bonds, and longer duration Provincials were also strong performers. The AA and higher corporate sector is dominated by short-term financials and its 4.1% return underperformed the broader corporate market. Spreads narrowed significantly on A-rated bonds and even more on BBB bonds which returned 8.4% and 9.7% respectively.

Pembroke Canadian Bond Fund Commentary

The Canadian Bond Fund returned 5.9% in the quarter which was in line with the FTSE Canada Universe Bond Index return of 5.9%. The fund benefited from spread narrowing on corporate bonds and the impact of the significant stimulus measures. The fund purchased high-quality issues such as TD and CIBC Bank deposit notes, NAV Canada, and Toyota Credit Canada that were available at very attractive yields. The fund finished the quarter with a yield to maturity of 1.7% and a duration of 6.6 years. While market yields remain at very low levels, the fund’s yield compares favourably to the index yield of 1.3%.The fund’s duration is also notably shorter than the index’s duration of 8.5 years.

Pembroke Corporate Bond Fund Commentary

The Corporate Bond Fund returned 11.6% in the quarter compared with the corporate index return of 8.1%. The fund benefited from the impact of the significant stimulus measures and the return of liquidity to the market. Canso was active buying corporate bonds early in the quarter in the primary and secondary markets at attractive levels. This led to substantial outperformance as spreads narrowed and prices recovered, particularly in the oil and gas and car rental industries. Canso continues to identify stressed companies that have sufficient short-term liquidity, good medium to long-term prospects, and the prospect of solid risk-adjusted returns. With a yield to maturity of 6.6% and a duration of 4.1 years, the fund is well positioned going forward.

Pembroke Canadian Balanced Fund Commentary

Pembroke’s Canadian balanced portfolio, the Pembroke Growth and Income Fund, reported strong returns in the second quarter of 2020. Performance was driven by gains in the equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund, as well as a recovery in the fixed income portion of the fund, represented by the Pembroke Canadian Bond Fund.

Equity returns of the fund were driven by a restoration of market confidence following decisive fiscal and monetary measures enacted to counter the fallout from COVID-19. Similarly, fixed income investments of the fund experienced price increases as credit spreads narrowed, reflecting greater investor confidence in the ability of corporate borrowers to service their debt obligations.

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 2.3%, 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 1.7% and an adjusted portfolio duration of 6.6 years. The asset mix of Pembroke’s Canadian balanced mandates did not change materially through the year, with approximately 30% of the portfolio invested in fixed income securities at June 30, 2020.

Pembroke 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 quarter, the fund gained approximately 17.2% compared to its benchmark (30% Canadian Universal Bond Index, 45% MSCI All-Country World Index, and 25% S&P TSX Composite Index), which gained 12.5%.

During the second quarter the fund maintained its diversification by asset class, by region, by factor (small cap and large cap), and by fund type (active and passive). At the end of the quarter the fund had a 69% allocation to global equities and a 31% allocation to Canadian corporate and sovereign bonds and cash.

The fund’s active equity allocations benefitted from the managers’ focus on high-quality growth companies in markets across the world. The funds also benefitted from a very low exposure to the energy sector and a meaningful exposure to the information technology sector.

The bond allocation is largely to the Pembroke Corporate Bond Fund which outperformed its benchmark during the quarter. At the end of the quarter, the corporate bond fund had a yield to maturity of 6.6% and a duration of 4.1 years compared with its benchmark the FTSE Canada All Corporate Bond Index which had a yield to maturity of 2.1% and a duration of 7.0 years. During the quarter, the corporate bond fund returned 11.6% compared with the benchmark’s 8.1%. The corporate bond fund’s low duration should position it well if rates rise from their historically low levels.

READ THE FULL PERFORMANCE UPDATES:

• Pembroke’s Canadian Bond Fund
• Pembroke’s Corporate Bond Fund
• Pembroke’s Canadian Balanced (Growth and Income) Fund
• Pembroke’s Global Balanced Fund

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