Fund in Focus: NCM Short Term Income Fund

Higher risk, but complements a diversified portfolio

With continuing upward pressure on interest rates, short-term bond funds are expected to come under even more pressure. But NCM Short Term Income Fund, managed by Bill Holy and Owen Morgan, is an option for those seeking a higher yield and who are comfortable taking on a bit more risk.

The fund invests in a diversified portfolio of short-term high-yield bonds, senior bank loans, and investment-grade bonds. The underlying yield of the portfolio is listed at 4.3%, which is well above the 2.9% offered by the S&P/TSX 60 Index.

But overall risk is also higher because the fund is taking on more credit risk. It is also more volatile than other short-term bond funds, with an average 3-year standard deviation of 4.2%, nearly double that of most of its peers. The fund is consequently susceptible to larger swings. For example, between mid-2015 and early 2016, when crude oil sold off sharply, the fund fell more than 5%, but then rebounded strongly, ending 2016 up more than 5%.

The target mix is roughly 50% short-term high-yield bonds and 50% senior loans, a mix that dramatically reduces interest rate sensitivity. Credit risk is an issue; however, bank loans sit very high in a company’s capital structure, helping mitigate that risk. To protect against default in the high-yield holdings, the managers do a significant amount of credit analysis to fully understand a company’s overall debt situation.

Returns have been modest in absolute terms, but the fund has consistently produced solid returns. Its 3-year average annual compounded rate of return ending Feb. 28 was 4.0% for the Series F units, well above the category average of 2.6% for the period.

The fund pays a monthly distribution that is adjusted based on the yield outlook. Distributions are currently $0.03 monthly, for an annualized yield of 4%. MER is a relatively steep 1.2%, but the costs have thus far been more than offset by the higher return.

The fund isn’t for everyone and is not a core holding. But those comfortable taking on a bit more risk can earn a higher return and shorten the duration of their fixed-income sleeve by adding an appropriate allocation of this fund to their otherwise well-diversified portfolio.

NCM Short Term Income Fund
Fund company: NCM Investments
Fund Type: Miscellaneous – Income and Real Property
Style: Bottom-up Credit Analysis
Risk level: Low-Medium
Load status: Optional
RRSP/RRIF suitability: Good
Managers: Bill Holy, Owen Morgan
MER: 1.21% (Series F)
Fund code: NRP1100 (Series F)
Minimum investment: $5,000

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

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.