“Some use statistics as drunkards use lamp-posts – for support rather than illumination.”
As 2017 comes to an end, it is only appropriate that we reflect on positioning and performance across our fixed income strategies and set the course for what is shaping up to be a challenging 2018. That is not to say that 2017 was not challenging. In fact, when we compare “consensus” expectations for 2017 with actual realizations, we see that this past year has been anything but predictable (see Figure 1 below). Not that this should surprise us – as the common saying goes: “Fool me once, shame on you. Fool me twice, shame on me.” If the last several decades have taught us anything, it is that investors’ predictions (in aggregate) have almost always been wrong. When the Fed was in tightening mode, investors persistently predicted fewer hikes than the Fed delivered, and the rest of the time, interest rates were supposed to shoot for the moon, but ended up six feet under. When in doubt, blame gravity.
Figure 1: Consensus expectations versus outcomes for 2017
“To guess is cheap, but to guess wrongly is expensive.”
Signature’s approach to managing its fixed income strategies leaves nothing to pundit prognostications. We adopt a carefully designed framework that enables us to diversify our strategies’ exposures across the fixed-income risk spectrum and improve their risk-reward profiles over the long run. In October, Kamyar laid out Signature’s framework for fixed-income portfolio management in his blog “Portable beta in modern fixed income design.” The four pillars of design are summarized in Figure 2 below.
Figure 2: Four pillars of modern fixed income portfolio design
The core portable beta pillar is benchmark-agnostic and, therefore, implemented similarly across Signature’s fixed income mandates. Figure 3 below shows the current composition of the core portable beta strategy in the Signature Global Bond Fund. As previously discussed above, it is designed to be a well-diversified collection of fixed-income risk premia (duration, convexity, inflation, and credit) that contributes positively to strategy performance without correlating positively to equity risk premia.
Figure 3: Signature Global Bond Fund core portable beta composition, as of December 12, 2017
As for the core total return pillar, its implementation will depend on the dominant risk in each strategy. Figure 4 shows the implementation of core total return for three Signature funds. The goal of core total return positioning is to ensure that each strategy’s total risk is lower than that of its benchmark, without compromising portfolio carry.
Figure 4: Core total return strategy implementation
“Those who have knowledge, don’t predict.”
Looking back over the past year, the core portable beta positioning contributed positively to all of Signature’s duration-sensitive fixed income strategies. Referring to Figure 5 below, which shows the year-to-date performance attribution breakdown for the Signature Global Bond Fund to the end of November 2017, we see that the total excess returns (made up of the core portable beta positions described in Figure 3) contributed positively to alpha performance. On the other hand, returns associated with core total return positions (described in Figure 4) were mixed in 2017. For the Signature Canadian Bond Fund and the Signature Tactical Bond Pool, the flattening of the Canadian interest rate curve detracted from alpha returns in 2017. This happened as short-term interest rates rose with BoC policy action, but long-term (30-year) interest rates fell. For the Signature Global Bond Fund, the euro underweight detracted from performance as the currency was the best performer among its developed market peers, including against the Canadian dollar (CAD).
As we turn our attention to 2018, we maintain the core total return positioning described in Figure 4. As for the core portable beta positioning, we continue to maintain a diversified exposure to fixed-income risk premia by coupling duration-sensitive government bonds with global investment-grade credit, US-dollar-denominated emerging market sovereigns, inflation-linked bonds, US agency mortgage-backed securities and, where appropriate, global high-yield credit and preferred shares. The composition (i.e. the relative allocations between the various assets) will continue to be managed tactically. This is especially important because throughout 2017, some of the asset classes, particularly US IG corporates, outperformed on a risk-adjusted basis and look fully valued.
Figure 5: Signature Global Bond Fund year-to-date performance attribution, as of November 30, 2017, gross of fees, taxes and expenses
Figure 6: Signature’s duration-sensitive fixed income product suite
Figure 7: Standard performance data as of November 30, 2017
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This commentary may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated, the indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. First Asset Investment Management Inc., manager of First Asset Long Duration Fixed Income ETF, is an affiliate of CI Investments Inc.