CANADA TIP SHEET: Corporate Bonds Boost Bissett Fund's Returns

    --Bond fund overweight in corporate credit securities

    --Insurers more attractive than banks due to wider rate spreads

    --US holdings unhedged against Canadian dollar

       By David George-Cosh 

    TORONTO (Dow Jones)--In a low volatility environment, picking corporate and government credit securities may be the best way to ensure steady returns in your fixed-income portfolio.

    That's the basic strategy behind the Bissett Canadian Short Term Bond fund, which has took its overweight positions in investment-grade securities to help outperform its benchmark, the DEX Universe Short Term Bond Index over the past 12-months.

    "While we take on higher percentages of credit risk, we're mindful of being wary of adding risk for risk's sake," said Heather McOuatt, portfolio manager at Franklin Templeton who manages the fund.

    The bulk of the fund - about 57.85% - is held in corporate securities, while government notes within the federal, provincial and municipal sectors, comprise the remaining weightings.

    The fund's focus on corporate credit instruments, about 70% of which are based in the financial services sector, help the portfolio to generate a higher running yield and provides a "nice cushion" in case interest rates were to rise in the future, Ms. McOuatt said.

    Ms. McOuatt said the risk-return profile of corporate bonds compared to their federal counterparts is attractive, and is likely to remain so in the medium-term.

    "When we're looking at interest rates in the 2-year term at 1.2% and we can buy a security that has an extra 60-basis-point spread on that, we're basically increasing our running yield by 50% and that's very attractive," she said.

    On the government side, while the fund has several positions in Canada Mortgage Bonds, federal mortgage-backed securities from the National Housing Association and Canada Housing Trust, provincial securities are seen to offer healthy returns as provincial budgets across Canada improve.

    "What we are seeing are governments that are...putting their money where they're mouth is, so to speak," Ms. McOuatt said.

    Some of the fund's key corporate holdings include PSP Capital, a subsidiary of the Public Sector Investment Board, Toronto-Dominion Bank and Sun Life Financial. Ms. McOuatt prefers insurers, which offer large yield spreads over the relatively low-yielding major Canadian banks.

    "Short-term corporate bond spreads are right at fair value right now over a 10-year basis," Ms. McOuatt said.

    The fund does have a small weighting of funds allocated in U.S. denominated bonds, which are not hedged against the Canadian dollar.

    Ms. McOuatt said the choice to unhedge its currency exposure lies in the fact the loonie has remained rangebound for quite some time. She also expects the Canadian dollar to slightly weaken over time, which should increase the value of the fund's U.S. holdings.

    Write to David George-Cosh at
