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Market swings intensify yearning for bonds

Ignored asset class can serve as a 'portfolio stabilizer'

MUTUAL FUNDS REPORTER

Stomach-churning swings in the equity markets have given a new sense of urgency to finding the right fixed-income fund.

The asset class -- anchored by core Canadian bond funds and supported by a mix of corporate and international bond funds -- was an afterthought during the market's four-year bull run, said Jordan Benincasa, fund analyst at Toronto research firm Morningstar Canada.

As of Jan. 31, net assets in Canadian bond funds totalled about $57-billion, about 8 per cent of all assets held in mutual funds. In comparison, equity funds hold $337-billion, about 51 per cent of all assets.

Then, on Tuesday, Feb. 27, Canada's benchmark stock market index suffered its biggest one-day drop in almost three years, falling 2.7 per cent.

"The correction was a great wake-up call," Mr. Benincasa said.

That day, all equity fund classes fell while core fixed income was up 0.5 per cent and global fixed-income funds rose 0.7 per cent. An aggressive portfolio holding 30 per cent of its assets in bonds and 70 per cent of its assets in equities would have lost only 1.8 per cent in value on Feb. 27, Mr. Benincasa said.

Bond funds are "a portfolio stabilizer," said Dan Hallett, a mutual fund analyst based in Windsor, Ont., in a March 2 report.

A slowing economy "prompts central banks to, at best, lower interest rates (great for bonds) or, at worst, leave rates alone (which means bonds will post positive returns). So, even though their future return potential is nothing to brag about, bonds serve an important role," Mr. Hallett said.

Many sources stressed the importance of fund fees. The higher the annual management expense ratio (MER), the greater the impact on returns.

"You need to be concerned about the cost," said portfolio manager Adrian Mastracci, head of KCM Wealth Management in Vancouver. "A 4-per-cent return doesn't leave you a lot of wiggle room for fees."

There's some agreement, too, that volatile equity markets are here to stay, cementing the need for a good fixed-income portfolio.

"We have been recommending a 40-per-cent fixed-income weighting for some time," said Chris Reynolds, president of Investment Planning Counsel Inc., a Mississauga-based wealth management firm with about 500 financial advisers.

"We have been telling people for years to not try and time the market but keep a fixed allocation of equities and fixed income and then rebalance," he said.

Here are three Canadian bond funds that received good reviews from advisers:

iShares Canadian Bond Index: "A dollar saved is a dollar earned," said Olivia Woo, vice-president and investment counsellor at T.E. Investment Counsel Inc. In a low-yield environment, it's difficult for bond managers to add significant value, she said. As a result, the Calgary firm favours the $721.4-million fund administered by Barclays Global Investors Canada Ltd. The top performer has a tiny MER of 0.3 per cent.

Phillips Hager & North Bond Class A: A fixed-income stalwart. The fund has an impressive annual average return of 9.8 per cent since inception in 1970. Returns are boosted by a slender MER of 0.59. The catch? Minimum investment of $25,000.

Trimark Canadian Bond: A favourite of Michael Morrow, a financial adviser based in Thunder Bay, Ont. A solid conservative fund holding about 60-per-cent Canadian government bonds and a mix of corporate and mortgage-backed securities. One-year, three-year and five-year returns of the $1.3-billion fund are all ahead of the competition.

***

Top-10 fixed-income funds

Fund name (Jan. 1)AUM (billions)1-year return
TD Canadian Bond$8.53.17
Bissett Bond - A $3.6 2.93
MB Fixed Income$3.5 4.99
RBC Bond$3.2 3.66
Investors Government Bond$2.4 2.01
Investors Mortgage and Short Term Inc. $2.2 2.43
BMO Bond$2.0 3.1
United-Cdn. Fixed Income Pool Cl. W$1.8 4.66
RBC Cdn. Short-Term Income$1.8 2.59
CI Canadian Bond$1.7 3.02

SOURCE: GLOBEFUND

© 2007 The Globe and Mail. All rights reserved.

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