Fund in Focus: PH&N Inflation-Linked Bond Fund

FundGrade A+® Award winner

One way to protect your fixed-income holdings against the threat of inflation is to invest a portion of your bond allocation in real return bonds (RRBs), whose coupon rate moves with the rate of inflation in the economy. The principal amount of the bond is also adjusted to move in line with inflation. In Canada, there are very few such funds available, and PH&N Inflation-Linked Bond Fund has been one of the strongest performers in the category, delivering a one-year return of 12.2% to Feb. 29. That compares with 11% for the category average in the same period. The consistent top-quartile performance has earned the fund the FundGrade A+ Award for three consecutive years since 2017.

The portfolio is concentrated, with the top 10 bonds comprising 89% of total holdings at Jan. 31. This level of concentration doesn’t indicate a high-conviction call by the manager but is more a reflection of the limited number of real return bonds available in Canada. In fact, according to Bloomberg data, there are less than 100 real return bonds in Canada, with the majority being government issues.

The maturity profile of the fund is longer-term, with an average term to maturity of nearly 17 years as of Jan. 31, resulting in a duration of 14.7 years. This high duration makes the fund sensitive to rate fluctuations. Because of this, the fund tends to be more volatile than the broader bond market. At the end of February, the 3-year average annual standard deviation of the fund was 5.9%, virtually identical to the FTSE Canadian Bond Universe Index, but more volatile than many of its peers.

Yet despite its higher volatility, the fund has rewarded investors with returns that are well above average. In fact, the fund has posted above-average returns in every calendar year after 2013. A key contributor to this outsized return would be its lower cost, with an MER of 0.55% for the Series D units.

While the outlook for inflation remains muted in the near term, it has a way of creeping back. This fund provides a good way for those seeking to add some inflation protection to their fixed-income portfolio. However, it is not a core bond holding, as it can be more volatile than the broader bond market and very sensitive to movements in interest rates. Instead, consider it a good addition to an otherwise well-diversified bond allocation.

PH&N Inflation-Linked Bond Fund
Fund company: RBC Global Asset Management
Fund type: Canadian Inflation Protected Fixed Income
FundGrade: B (February)
FundGrade A+ Awards: 2017, 2018, 2019
Style: Top-down macro analysis
Risk level: Low
Load status: Optional
RRSP/RRIF suitability: Good
Manager: PH&N Management Team
MER: 0.55%
Fund Code: RBF1650 (Series D, no-load units)
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.