Performance and Positioning:
 

• Very strong finish to 2021, up 1.02% in December, ranking in the top 10% of the category for that month
  • This was largely due to sector and country allocation, especially driven by an overweight allocation to high-yield corporate and convertible bonds, combined with an underweight allocation to U.S. Treasuries, agency mortgage-backed securities, Japan, and China
• While the fund did finish slightly negative for 2021 (down 0.15%), it still finished 1st quartile in the category (25th percentile)
• 2021 was a unique year for the entire category – with the category average being down 1- 2% and Morningstar Gbl Core bond GR Index down 6.53%
• funds in 4th quartile started in the -2.5% area. The absolute bottom of the category ranged between ~-7 to -8%

Performance Attribution
 

• Main detractor in the portfolio over the last year was steepening of the yield curve, while not exposed to the long-end, the mid-range steepened as well. The team actively manages duration and shifted between 2.5-4yrs over the course of the year.
  • In addition the team’s higher quality bias within high yield corporates hurt performance in Q1, where the lowest quality end of the credit spectrum was rewarded
• Largest contributors were currency management, sector and country allocation
  • In addition, security selection within investment grade corporates contributed to performance in second half of the year
     

2022 Outlook and Expectations
 

• Cautiously optimistic, overall constructive on global markets
  • While growth has slowed, we remain in a positive growth environment
  • Covid levels appear to be peaking, new variant less dangerous
  • Central banks tone has changed a little and market has reacted to the more hawkish sentiment
• Expected rate hikes already fully priced in for the most part by the markets, assuming this is the case, target return of 2-4% for 2022, based on:
  • Current yield 3.7%
  • Capital appreciation from credit spread compression
  • HY tailwind via “fallen angels” who were sold off, with chance of upgrade from balanced sheet fortification
  • Currency through active USD hedge management and CAD/EM
  • Tactical duration management as team continues to monitor rate fluctuations

 

Positioning

Duration: 3.68yrs

• Brought higher from 3.5 with move in yields above 180bps
• Favour short end of curve, expected to shift between 3.25 and 4.25 for the year depending where yields are trending
• Selectively embracing Corp credit: 25% US High Yield
• This had come down from June of last year at around 38.5%
• Reduced by moving from fixed rate into floating rate bank loans (10%)
• Reflection of Defensive posture and reducing interest rate risk

Investment Grade corporates: 12.5%

• Predominantly triple BBB, most were A or AA rated, but downgraded over pandemic

Preferred Shares: 7.5%

• Rising rate environment expected to provide tailwind

Emerging Markets: 17%

• Massive differentiation in EM space, targeting economies with stronger underlying fundamentals like Indonesia, Phillipines, Singapore, India, Brazil
• Ability to allocate capital to Indonesia on the back of volatility
• Accelerating GDP growth, low inflation relative to target band, ability to hike or cut rates
• Investment grade rated bond with low ownership of domestic bonds by foreign holders, avoiding headline risk
• Over 6.5% yield, currency strong relative to CAD

CAD/USD
 

• Long term/12 month view CAD should strengthen
• 3-6 month view is the CAD/USD will remain rangebound between 78-83 cents, due to a couple different variables at play that will affect this:
  • uncertainty in the timing of global central bank policy changes o overall impact from the Omnicron variant and how local governments react to this
  • geopolitical uncertainty and overall risk sentiment
• As a result, long term bias to be fully hedged, but the short-term variability may present opportunities for tactical shifts as the exchange rate approaches one end of the range or the other.

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