Skip navigation

Mutual Fund News

Low-level bond returns new reality

Poor, single-digit results for foreseeable future pose a conundrum for investors

MUTUAL FUNDS REPORTER

If bond fund returns have got you depressed of late, get used to it: Stale results are here to stay.

"It would be highly unlikely to create wealth from fixed income on a go-forward basis," is the sobering forecast from Satish Rai, the lead manager of the $7.1-billion TD Canadian Bond Fund. He expects the asset category, on average, will return less than 5 per cent annually for the next three to five years.

A gain of 5 per cent may, in fact, be too ambitious for the bulk of bond funds in 2006. In the first quarter, three bond fund classes were the worst performers from a group of 32 mutual funds surveyed, Globefund reported. Foreign bond funds lost 0.64 per cent of their value in the first three months, a dismal performance when compared with top-performing precious metal funds, up an average of 28.8 per cent in the same period.

The poor returns are a conundrum for investors; bond funds are a core component of fixed income, an asset class that can make up anywhere from 20 per cent to 40 per cent of an investment portfolio. Investors must make a fundamental shift and view bonds as a wealth preserver rather than a wealth generator, Mr. Rai said.

The debt-financed economic growth of the 1990s was a boon for bond holders, he said.

"We have gone through this period where the borrowers have been punished and the savers got a lot of money. Now, we've got the opposite environment where the savers are not going to earn a lot of money. No matter how much you squeeze that orange, there's only so much juice you can get out of it."

Ironically, unprecedented international growth is putting the damper on the bond market's fortunes. Japan and the economies of Europe are joining the global boom, prompting central banks to tighten their monetary polices to stave off inflation. Stable economic growth is weakening bond prices and returns.

"The last 25 years have been a great period for bond investors because we've had declining inflation and declining interest rates," said Scott Lamont, head of fixed income at Phillips Hager & North Investment Management Ltd. The Vancouver money manager oversees about $4-billion in bond funds for retail investors.

"We're now in an environment where yields on bonds are 4 to 4½ per cent. You are just not going to see the consistent kind of 7-, 8-, 9-, 10-per-cent returns that we have seen for the last 10 to 25 years. Expectations have to be readjusted," Mr. Lamont said.

Fund executives and financial advisers encourage investors to take a two-pronged approach: Maintain exposure to bond funds, while at the same time diversify to better-performing fixed income assets. Income funds that invest in a mix of bonds and income trusts frequently are cited as a good alternative; many advisers shun foreign bond funds because of the currency risk.

"Hang tough," said F. Blaine Dickson, branch manager of Capri Intercity Financial in Kelowna, B.C. "Every portfolio, even those for income investors, should have some sort of equity component for hedging against inflation . . . What you lose in bond returns due to a rising interest rate environment should be gained from the outperformance of the equity portion of the portfolio, which is doing nicely at the moment."

At Absolute Group Inc. in Calgary, fixed income investments, such as bonds and GICs, make up only 20 to 25 per cent of a client's portfolio who is more than 10 years away from retirement, president Kevin Cork said.

"We view fixed income investments more as a place to store the 'extra' profits from other sectors of the portfolio rather than a return-generating sector itself. On the flip side, we use the fixed income sector as a source of investment capital when the markets tank," Mr. Cork said.

Gavin Graham, chief investment officer at Guardian Group of Funds Ltd., suggests investors look hard at short-term bond funds and corporate bond funds.

Short-term funds guarantee the yield of a long-term fund with potential upside, while "if the economy is doing well, it's actually good news" for corporate funds, Mr. Graham said.

Bland bonds

Investors should get used to the stale returns seen by bond funds in recent months, fund managers say, because the debt-financed boom of the 1990s is long gone and the fixed-income component of your portfolio is no longer for wealth generation but for wealth preservation.

'We have gone through this period where the borrowers have been punished and the savers got a lot of money. Now we've got the opposite environment... No matter how much you squeeze that orange, there's only so much juice.'

SATISH RAI, VICE-CHAIR OF TD ASSET MANAGEMENT, MANAGER OF TD'S CANADIAN BOND FUND

Best

Avg. 1-month return as of March 2006Avg. 1-month return as of February 2006Avg. 1-month return as of January 2006Avg. 3-month return as of March 2006
Precious metals12.24%-2.45%17.44%28.75%
Emerging markets equity3.17-0.5510.7513.60
Asia ex-Japan5.13-0.187.2112.60
European equity6.180.154.4811.11
Canadian small capitalization5.21-1.86%6.9110.43

Worst

Avg. 1-month return as of March 2006Avg. 1-month return as of February 2006Avg. 1-month return as of January 2006Avg. 3-month return as of March 2006
Foreign bond0.48%-0.57%-0.55%-0.64%
Canadian bond-0.310.39-0.65-0.58
Canadian short-term bond and mortgage0.090.050.110.26
Canadian money market0.150.190.240.58
Labour-sponsored venture capital0.64-0.340.330.65

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

Search Fund News


Advanced Search

GlobeinvestorGOLD.com

Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.

Discover a wealth of investment information and and exclusive features.

Free E-Mail Newsletters

  • Morning news headlines
  • Morning business headlines
  • Financial highlights
  • Tech alert
  • Leisure

Sign-up for our free newsletters



Back to top