Fixed Income & Balanced Strategies


Fixed Income & Balanced Strategies – Q3 2020

Canadian Bond Strategies – Q3 Portfolio Commentary

For the quarter, equity markets were positive and corporate bonds outperformed Governments by a wide margin. This performance occurred despite the fact that markets took a breather from their spectacular rally in September. Equity markets sold off somewhat and credit spreads widened. Stretched equity valuations in some sectors and fears of the fallout from a second wave of the pandemic seemed to be the likely culprits. The US election campaign provided many headlines but did not have a major market impact.

Even with the September reversal, BBB bonds were the best performers for the entire quarter, as that is where credit spreads tightened the most. The 1.9% return of the BBB sector was well ahead of higher rated corporates and significantly ahead of the flat 0.0% return of Canada bonds. Canada bond yields are so low that it took only a very small yield increase to produce a flat return and as the yield curve steepened, long bonds underperformed. For the most recent 12 months, corporate bond returns are in line with Governments, despite their March selloff.

Canadian Bond Fund

The Canadian Bond Fund returned 0.66% in the recent quarter which was slightly ahead of the benchmark index. The fund benefitted from its exposure to corporate bonds as credit spreads narrowed during the quarter. The manager purchased a 3-year NHA mortgage backed security, bought a Greater Toronto Airport Authority long bond at an attractive yield of 2.5%, and added to Canadian bank deposit notes. The portfolio characteristics remained consistent with the previous quarter-end as duration was 6.6 years and portfolio yield were 1.6%. The fund’s duration is almost two years shorter than the benchmark index and the fund yield is slightly higher than the benchmark yield of 1.25%.

Corporate Bond Fund

The Pembroke Dividend Growth Fund is a Pooled Fund. This is a prospectus-exempt product that is only offered to investors who meet the definition of an “accredited investor” under securities legislation.

The Corporate Bond Fund returned 4.46% in the period which was over 3% ahead of the corporate index. Narrowing credit spreads and a rebound in the prices of Hertz, Maxar, and Bombardier holdings all contributed to the strong quarter. The manager added to holdings of Trans Canada Pipelines, and energy holdings at attractive yields. The manager sold US dollar holdings of Dell International which had appreciated considerably and trimmed holdings in Bell and Cogeco that had also rallied. The portfolio is well positioned with a duration of 3.7 years and has a healthy yield of 6.4%.

Pembroke’s balanced portfolio, the Pembroke Growth and Income Fund, recorded strong returns in the third quarter of 2020. Performance was largely driven by gains in the equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund, and were supplemented by steady returns 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, prices of the fixed income investments of the fund appreciated 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 1.6% and an adjusted portfolio duration of 6.6 years. Minor changes to the asset mix of Pembroke’s balanced mandates were made through the year, with approximately 29% of the portfolio invested in fixed income securities at September 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 6.70%, well ahead of its benchmark (30% Canadian Universal Bond Index, 45% MSCI All-Country World Index, and 25% S&P TSX Composite Index), which gained 3.95%. The fund has gained 9.47% in the year-to-date through September 30, 2020 and 14.32% in the year-ended September 30, 2020; its benchmark returned 3.73% and 7.46% respectively over the same periods.

During the third 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 66% allocation to global equities and mutual funds including an allocation to gold. The fund had a 34% allocation to Canadian corporate and sovereign bonds and cash. The cash position during the quarter was higher than in previous quarters following a reduction in the corporate bond allocation and as additional allocations were under review.

The fund’s active equity allocations benefitted from the managers’ focus on high-quality growth companies in markets across the world. The equity exposure also benefitted from a low exposure to the materials and energy sectors 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 6.4% and a duration of 3.7 years. During the quarter, the corporate bond fund returned 4.46% compared with the benchmark’s 1.34%. The corporate bond fund’s low duration should position it well if rates rise from their historically low levels.


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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.