Fund in Focus: Franklin Bissett Core Plus Bond Fund

Corporate bond exposure helps deliver gains

The Franklin Bissett Core Plus Bond Fund continues to be one of my favourite Canadian bond funds. The fund had a strong year in 2019, which continued into early 2020, with the 1-year return to Jan. 31 at a respectable 8.9% compared with the Canadian Fixed Income category average of 7.4%.

This fund remains one of my top mutual fund picks. It targets returns in excess of between 50 and 150 basis points over the benchmark with a Canadian-focused mandate that allows the managers to invest across the Canadian fixed-income universe.

Headed by Tom O’Gorman, who is Senior Vice President and Director of Franklin Bissett Fixed Income, and Senior Vice President Darcy Briggs, the management team uses a process of top-down macro analysis and bottom-up sector and security analysis. The top-down analysis looks at broad global economic trends in interest rates, growth, inflation, central bank policies, while an analysis of sector fundamentals determines the most attractive areas for investment.

Individual security selection is done using a bottom-up credit analysis process that considers valuation, duration exposure, strength of the underlying financials and fundamentals, quality of management, and liquidity.

This is a “core plus” mandate, so the managers have some additional tools available for portfolio management. Up to 25% of the portfolio can be held in high-yield issues. It can also invest up to 30% outside of Canada, of which 10% of currency exposure can be unhedged.

The fund’s 37% weighting to corporate bonds accounts for much of that performance. In their fourth-quarter 2019 report, the managers wrote, “In contrast to the negative quarterly returns posted by the broader Canadian fixed income market as bond yields drifted higher, corporate credit generated positive returns as tighter credit spreads offset slightly higher government bond yields.”

Over the long-term, performance has been above average with the fund marginally outpacing its peers over the past five years, with an average annual compounded rate of return of 2.5% to Jan. 31, and handily outperforming over the past three years, with an average annual compounded rate of return of 4.2% compared with 3.4% for the category average. Year to date to Jan. 31, the fund is ahead 3.0%, again outpacing the category average of 2.6%.

The managers’ outlook remains positive. Briggs and O’Gorman write, “Given the current rally in credit, valuations are becoming stretched, but demand for corporate credit remains positive. The fund remains overweight corporate bonds with a preference for higher-quality credits at this late stage in the economic cycle. We continue to look for opportunities to reduce risk and upgrade credit quality while capitalizing on trading opportunities presented by increases in volatility.”

Volatility has been in line with the index with a 3-year average standard deviation of 3.8, almost exactly in line with the category median. Most impressive, though, is the way the fund has protected capital in down markets. Over the past three years, it has participated in only two thirds of the market drawdowns, and just shy of 70% over the past five years. This, combined with the relatively low 1.38% MER for the Series A units, make the fund a compelling option in the Canadian fixed-income category.

Franklin Bissett Core Plus Bond Fund
Fund company: Franklin Templeton Investments
Fund type: Canadian Fixed Income
FundGrade: B (January)
FundGrade A+® Award: 2018
Style: Top-down macro analysis
Risk level: Low
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Darcy Briggs since Dec, 2014; Thomas O’Gorman since July 2010
MER: 1.43%
Fund code: TML200 (Front-end load)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

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.