ONE Fixed Income Funds Continue to Provide Stability

December 16, 2020

It has been an unusual year for investors and as the pandemic wears on into 2021, the uncertainty – economic and otherwise, will likely continue. ONE’s portfolio managers have been actively managing our investment offerings, and they continue to position portfolios to weather a myriad of conditions that may arise.

Fixed income is an important part of any investment strategy, helping to provide stability and protect principal when markets turn downward. This was true for ONE’s fixed income products, the ONE Canadian Government Bond Portfolio and the ONE Canadian Corporate Bond Portfolio, which both delivered outsized returns this year.

As the Bank of Canada cut interest rates to address the economic fallout of the pandemic, bond prices increased, noted co-portfolio manager Soami Kohly of MFS Investment Management Canada, which manages both of ONE’s Canadian bond portfolios.

MFS also was proactive to increase credit risk in the Canadian Corporate Bond Portfolio, moving from a very low risk posture to a more medium risk level in late March. A move like this generally helps investors take advantage of an improvement in valuations and a positive outlook for credit as borrowing costs remain low. Corporate bonds have historically offered incrementally better returns than traditional government bonds, while offering less short-term risk than equity investments.

“ONE’s holdings are somewhat COVID-resistant, given we hold higher-quality corporate credit in businesses like banks, utilities, telecommunications and grocery retail,” Kohly added.

Earlier this year, the Bank of Canada took the unprecedented step of purchasing large scale assets like government bonds and corporate bonds to bolster markets and the economy. This move, combined with government stimulus funding, provides bond investors with a greater level of comfort and confidence in these investments, noted Kohly.

Kohly also noted that given the pressure on local government services and the deferral of property tax payments, MFS has also increased liquidity in the bond portfolios, anticipating municipal cash flow needs.

There are still a lot of unknowns heading into 2021, with positive news about vaccines and less certainty about who will get them and when. Interest rates are expected to stay at or near historic lows. In this environment, Canadian bonds are generally sought after globally. ONE’s investors can take comfort in knowing that the corporate and government bond portfolios are focused on higher-quality bonds, which typically come with higher levels of liquidity to meet unanticipated cash flow needs. 

While lower interest rates mean lower yields, the ability to counteract uncertainty in equity markets means that fixed income products must be part of any municipal investment mix. ONE’s Canadian bond portfolios, which are both eligible investments for municipalities under provincial regulations, will remain focused on avoiding unintended risks and maximizing opportunities in credit markets through active security selection.

Category
Investment Planning
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