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FundGrade™ A Grade Steadyhand Income Fund takes defensive positioning
11/18/2017 1:02:08 AM
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DUE DILIGENCE
Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert



By Dave Paterson  | Wednesday, August 23, 2017


 



Despite lagging both the benchmark and its peers in the second quarter, the Steadyhand Income Fund, a fixed-income-focused balanced fund, remains one of my favourites, maintaining a monthly FundGrade A Grade for July and earning a FundGrade A+® Award for 2013 and 2016. Here’s why.

Managed for Steadyhand by Brian Eby of Connor Clark & Lunn Investment Management, the fund has a target asset mix of 75% bonds and 25% high-yielding equities, such as dividend paying stocks and real estate investment trusts (REITs).

At the end of June, it was slightly below its bond target, with 73% of the fund in fixed-income investments. Historically, the fund favoured corporate bonds, but in recent quarters, this mix has shifted. The fund now favours government bonds, with provincials making up the bulk of the exposure because of their higher yield. Corporate bonds now make up about 30% of the total fund.

The balance of the fund is invested in high-yielding equity, which makes up 23%, and 4% invested in REITs.

Year to date, performance has been disappointing, with the fund gaining a modest 0.06% to the end of July, while edging down -1.3% over the past year. These numbers have lagged both the benchmark (25% S&P/TSX Composite Total Return Index/75% FTSE/TMX Canada Universe Bond Index) and the peer group. In the longer term however, the fund has performed very well, with a five-year average annual compounded rate of return of 4.6%, outpacing the benchmark. It has consistently outperformed its risk group, the Fundata Prospectus Risk Index (Low to Medium) as seen in the graph below.

Volatility has been roughly in line with the broader Canadian bond market, despite having more than 25% invested in equities.

Looking ahead, the managers’ focus remains on risk management, and they have continued to move the portfolio to a more defensive positioning. On the equity side, they look for quality companies that can not only sustain, but grow, their dividends. They also prefer more “value” type stocks rather than growth names, which typically carry higher levels of volatility and risk. In the fixed-income sleeve, quality is also the focus, with only a modest exposure to non-investment-grade debt.

In the current environment, I expect returns will remain under pressure, as the interest rate environment appears to have shifted and now favours potentially higher yields with increased volatility. With more than a quarter of the fund invested in quality equities, I would expect this fund to be able to outpace more traditional bonds, but it may lag some of its fixed-income balanced peers that may carry higher allocations to equities.

I don’t see this as a bond replacement for most investors, but instead, see it as a great diversifier when used as part of a well-diversified portfolio. It can be a great complement to your current bond allocation.

target="_blank" Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

 

 
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