When interest rates fluctuate, you need to protect clients’ bond portfolios.
One way to do this is by creating yield cushions, says John Braive, vice chairman of global fixed income at CIBC Asset Management. He manages the Renaissance Canadian Bond Fund.
He achieves this by overweighting strong sectors such as corporate bonds and high-yield securities, he adds.
Read: Bearing up with bonds
For example, Braive currently has 14% of his portfolio in high-yield securities since government of Canada five-year securities only have a 1.5% interest rate today. In contrast, corporate bonds—which have maturities of up to 30 years—offer much greater yields.
In fact, Braive says his high-yield position is about 450 basis points greater than that of five-year government bonds. “We’ve put even more yield in the portfolio…so…it gives [people] a cushion in case interest rates rise.”
Drilling down further, Braive says he also has about 50% in investment-grade corporate bonds—counting the 14% held in high-yield, he has a total of about 64% invested in the corporate sector.
The portfolio can hold up to 75% in corporate securities, says Braive, but the supply of attractive securities has been low lately.
Braive adds to and manages his portfolio by considering:
- the duration of bonds;
- the yield curve positioning of bonds;
- the sector allocation of his portfolio (he focuses on government bonds, provincial bonds, high-yield bonds, corporate bonds or foreign securities); and
- the credit quality of attractive securities.
He considers each factor equally when assessing portfolio performance. Yet, says Braive, “there are occasions when one strategy will dominate.”
The duration of bonds (or how long they’ll be sensitive to interest rates), for instance, will be a key consideration throughout 2014. “If…interest rates are going to rise and hurt the portfolio,” says Braive, it’s best to “shorten the overall average maturity, or duration, of the portfolio so that the fund becomes less susceptible to [rising] rates.”
This can be achieved by buying short-term or floating-rate securities, or by having a larger cash position.