Fixed income offers a variety of opportunities, even in a low interest rate environment, finds a panel discussion at the CFA Society Calgary’s Wealth Management Conference.
Corporate bonds are still attractive, says Richard Usher-Jones, vice president and portfolio manager at Canso Investment Counsel. “Corporate bonds can be protective, and can benefit from a rising interest rate environment if you’re selective.”
Maple bonds — those from a foreign issuer, issued in the Canadian market in Canadian dollars — are also good options.
“We are buying higher quality bonds at a higher yield than similar issues in Canada. If you’re a portfolio manager who is concerned about the quality of the credit issuer and yield, it’s a good thing. If you do your research, there are a lot of attractive maple opportunities.”
Another option is floating-rate notes, which come with limited interest rate.
“You can also buy non-Canadian bonds,” he says, “but you’ve got to be careful if you’re buying those in a foreign currency and what you’re doing with foreign currency exposure.”
There is a perception that high yield is protective in a rising rate environment. “We are not supporters of that,” says Usher-Jones, who gives the example of an investor buying a high-yield bond today yielding 6%. “Two years down the road, I can get you an investment-grade bond or better quality, with the same yield at the same term. That high-yield bond is going to look pretty bad.”
In terms of portfolio positioning, he adds, “you can shorten term duration, but then you sacrifice yield.”
And when should investors choose passive over active? “If it’s a very efficient market, passive can make sense, because you can get your portfolio exposure cost effectively. But in less efficient markets, particularly the corporate bond market, you can do well in active management,” says Usher-Jones, noting indexing on the corporate credit side does not make sense.
He expects interest rates will gradually increase. “The absolute level of interest rates is low. We think that will change, and we’ll see rates continuing to trend higher over an extended period of time. The question is, when will stimulus be removed in the U.S.? That is going to affect the yield curve.”