For John Braive, investing in a low-rate environment can mean going longer on bonds than the benchmarks do.
Over the last couple of years, for example, his core and core-plus funds have been longer duration than the index by 20 to 40 basis points, says Braive, who’s vice-chairman of global fixed income at CIBC Asset Management.
He made the call “that there wasn’t going to be a big increase in interest rates, that the inflationary pressure story was wrong, [and] that we’re in a lower-for-longer rate environment,” he explains. “And this proved to be true.” With longer-duration bonds, he’s more sensitive to interest rate moves than his funds’ benchmark, which has a duration of about 7.8 years.
“It’s been a fairly good bond market,” says Braive, who manages the Renaissance Canadian Bond Fund. As of early June, he was still slightly long duration.
When it comes to weightings, not all bonds are created equal.
“We’re neutral on our overall strategy with regard to governments — especially provincials,” Braive says, because spreads for those bonds aren’t attractive.
In contrast, he’s “significantly” overweight corporate bonds, he says, adding that his firm does its own research analysis for corporates and high yield. “We build our portfolio from the ground up with the research on the individual credits and how much weight we’re going to have in every sector of the corporate market.”
Braive sees bank corporates as the gold standard, since “the banks are the backbone of credit.” Consider that banks have been subject to regulatory reforms following the financial crisis; so, “if those banks, instead of having 8% capital, have 11[%] or 12% capital [plus] additional buffers, they are indeed in very good shape.” He assesses corporates from other sectors “off of where the bank curve is.”
He also aims to identify undervalued new issues. An example is Chartwell REIT, which Braive says is a significant holding and “a strong performer.”
High yield opportunity
In the high yield space, his firm’s core-plus portfolios have an 11% weighting — slightly under the maximum weighting of 15%. But that’s because there aren’t enough opportunities available, not because spreads are unattractive.
“It’s been difficult holding on to a full 11% weight […] because a lot of issues are being called,” explains Braive. “Corporations have been taking advantage of the rate environment and the strong high-yield market to call older issues and reissue new securities.”
A called issue isn’t necessarily replaced with the more expensive new issue, he adds.
Overall, high-yield spreads have dropped from the peaks of a couple of years ago, says Braive. As of early June they were, “in aggregate, trading at about 360 [basis points] over Treasurys,” he says. “But that is a distorted number because a lot of the bonds in the index […] are trading at very low yields because they’re trading to call.”
Excluding those bonds from the index, Braive says the spread is reasonable, given the credit cycle and type of companies his firm holds. “We’re quite happy being with an 11% weight,” he says, which “has been adding performance to the funds.”