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A great run for bond funds: Be wary

rcarrick@globeandmail.com

What we're looking at

Top-performing Canadian bond funds. Technically speaking, the best of the bunch in the Canadian fixed income, Canadian short-term fixed income and Canadian long-term fixed income categories.

Our screen

We started with all Canadian bond funds that had a history going back 10 years or more and then zeroed in on funds that ranked in the first- or second-quartile returns for the 12 months and 10 years to April 30. Quartiles divide funds in a category into four groups by performance - one is best and fourth is worst.

Funds are ranked here from highest average annual 10-year return on down. (The top 25 are listed here; for the full list go to tgam.ca/cruncher.)

What we found

The numbers shown here are, let's be honest, spectacular. There are funds on this list that have delivered returns similar to what you might conservatively expect from equity funds. If you own any of these funds, enjoy the glow. If you're thinking of putting new money into bond funds, beware.

There's a sharp divide these days in the interest rate outlook between people who see rates rising and those who seem rates holding steady. Either way, you should expect bond funds to perform markedly worse in the years ahead than they have in the past decade.

Remember this basic piece of investing background: Falling interest rates send bonds and bond funds higher in price, rising rates mean lower prices and stable rates mean your returns will be in line with the yield on government and corporate bonds (2 to 3 per cent for the most part right now) minus fees. Interest rates have largely declined in the past decade, and that has provided a huge tailwind for bond funds. Unless the global economy collapses, we simply won't see rates fall in the years ahead. They may very well rise, which could mean losses from bond funds.

Virtually all investors need bonds in their portfolios to act as a cushion when stock markets plunge. But overemphasizing bond funds because they're performed so well is a mistake. Past returns will not be repeated any time soon.

*****

TOP-PERFORMING CANADIAN BOND FUNDS

FundAssets ($ thousands)MERMinimum initial investment ($)12-month return (to April 30)Annualized 10-year return (to April 30)
Beutel Goodman Long Term Bond-D288.50.795,00015.86%8.57%
Mandate National Mortgage Corp7.525,0005.42%7.99%
Beutel Goodman Corp/Pro Active Bd-D194.30.795,0007.79%6.82%
Altamira Long Term Bond255.01.241,00016.13%6.81%
SEI Canadian Fixed Income-O1,948.10.11150,0008.32%6.35%
Integra Bond182.51.1210,0009.30%6.33%
Beutel Goodman Income-D1,931.60.795,0006.75%6.29%
PH&N Bond-D864.10.6125,0007.88%6.24%
Harmony Cdn Fixed Income Pool-W62.30.1750,0007.86%6.20%
PH&N Total Return Bond-D787.00.625,0007.87%6.20%
TD Canadian Bond10,945.61.111007.75%6.00%
Russell Fixed Income Pool-A455.51.4125,0006.49%5.93%
GBC Canadian Bond50.30.94100,0006.71%5.80%
FÉRIQUE Bond538.70.545008.47%5.74%
RBC Advisor Canadian Bond119.40.9410,0008.08%5.60%
Mawer Canadian Bond80.40.955,0008.74%5.57%
FMOQ Canadian Bond209.80.955007.82%5.50%
TD Canadian Bond Index490.70.831007.97%5.44%
CIBC Canadian Bond2,170.11.515007.99%5.38%
MD Bond1,525.30.973,0007.32%5.38%
CIBC Canadian Bond Index432.71.145007.69%5.35%
HSBC Canadian Bond-I861.81.185007.22%5.29%
Scotia Canadian Bond Index557.40.841,0007.63%5.27%
Leith Wheeler Fixed Income52.10.8425,0008.01%5.27%
Dynamic Canadian Bond Fund1,488.71.545006.90%5.25%
Source: Globeinvestor.com

© 2007 The Globe and Mail. All rights reserved.

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