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'Explosive cocktail' helped real return bonds

What are we looking for?

Whether the party for Canadian real return bond funds is over.

Canada's annual inflation rate rose to more than 3 per cent during half a dozen months in calendar 2011. In three of the first six months of this year, however, the consumer price index has tumbled to below 2 per cent.

The screen

We ranked Canadian inflation-protected fixed-income funds by best performance for the year ended June. (We excluded duplicate versions.) These funds must be 90 per cent invested in inflation-linked securities.

What did we find?

Celebratory returns among most of the bond fund offerings.

BMO Real Return Bond exchange-traded fund (ZRR), which tracks inflation-linked Government of Canada bonds, led the pack with a 14.6-per-cent gain. IA Clarington Real Return Bond, a mutual fund which owns federal and provincial inflation-linked bonds, trailed slightly with a 14.2-per-cent return. Their strong performance contrasts with the double-digit loss by the Canadian stock market for the period.

Canadian real return bonds generally move in the same direction as regular (nominal) longer-duration bonds, which have rallied with the falling interest rates.These offerings are also affected by inflation expectations by investors.

The biggest portion of the one-year return took place in the second half of 2011, said Christian Pouliot, a portfolio manager with Industrial Alliance Investment Management Inc., and co-manager of the IA Clarington fund.

"We had a huge rally [in long term bonds], but we also had inflation in the economy," he said. "That is a very explosive cocktail for real return bonds." In the first half of this year, "the rally in bonds continued, but inflation slowed down a lot."

The manager doubts the party is over for real return bonds. "We can see lower bond yields in the future, but the biggest driver for the coming years should be inflation," he suggested. "Many central banks around the world are still easing their monetary conditions. We will reach a point where all the stimuli in the different world economies will gain traction, and bring inflation back to higher levels."



Assetsto June 30Calendar year returns
FundMER(in $ mil.)1 year3 yrs.5 yrs.2011201020092008
BMO Real Return Bond Index ETF0.2821.914.55%17.84%
IA Clarington Real Return Bond1.40119.414.17%11.59%8.15%17.78%9.89%12.97%-2.60%
Pimco Canadian Real Return Bond1.363.713.86%n/an/an/an/an/an/a
PS Real Return Bond Index A0.9923.613.57%n/an/a16.38%n/an/an/a
PH&N Inflation-Linked Bond0.5537.913.57%12.29%n/a17.11%10.73%n/an/a
iShares DEX Real Return Bond Index0.39696.013.46%12.18%9.19%17.88%10.62%14.10%-0.03%
TD Real Return Bond1.501,701.912.21%10.64%7.97%15.30%8.59%13.52%-1.20%
Mackenzie Sentinel Real Return Bond1.62317.312.20%10.47%7.83%14.78%8.39%12.58%-0.24%
Renaissance Real Return Bond1.67211.711.75%9.42%7.11%13.86%7.94%10.34%-0.05%
Investors Real Return Bond1.96338.211.11%9.18%6.61%13.44%7.96%9.68%-1.19%
Dynamic Real Return Bond1.8879.46.56%7.21%5.11%10.55%5.76%9.81%-3.17%
AGF Inflation Plus Bond1.85308.94.43%3.75%3.81%5.13%2.24%6.44%3.39%
S&P/TSX Total Return-10.25%6.69%-0.74%-8.71%17.61%35.06%-33.00%
DEX Real Return Bond Total Return Index14.93%12.96%9.82%18.35%11.09%14.50%0.42%
DEX Long Term Bond Total Return18.82%12.11%9.53%18.13%12.52%5.49%2.66%
DEX Universe Bond Total Return Index9.50%7.00%6.96%9.67%6.74%5.41%6.41%
Source: Lipper

© 2007 The Globe and Mail. All rights reserved.

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