What is Signature Tactical Bond Pool?
The new Signature Tactical Bond Pool is a globally diversified fixed-income portfolio that has the flexibility to respond tactically to shifting market conditions and ability to find the best opportunities to add risk-adjusted alpha. Our goal is to provide better returns than the FTSE/TMX Canada Universe Bond Index with less volatility.
Why should I invest in Signature Tactical Bond Pool?
Signature Tactical Bond Pool is our best solution for a comprehensive, stand-alone, global fixed-income portfolio. In an environment of low yields and high volatility, the ability to quickly capitalize on investment opportunities, manage risk and optimize allocations is paramount.
Since the 2008 global financial crisis, central banks around the world have kept interest rates at historically low levels. As yields have fallen, two effects have become apparent. First, the duration of broad fixed-income market indexes has increased. Second, the income portion of government bonds has diminished compared to the capital gains portion of the returns. Put another way, while government bond duration provides portfolio insurance, there is no income left. Conversely, there is income available in the high-yield market, but without the diversification benefit. As a result, clients primarily hold government bonds to diversify away from other risky exposures. We believe that higher-yielding sectors of the fixed-income asset class offer much-needed value and income. With higher yield, however, comes additional risk that requires active management.
Signature Tactical Bond Pool brings together these components by drawing from our multi-asset class allocation expertise and our strong track record in fixed-income portfolio management. The philosophy behind our strategy is to focus on actively managing the drivers of fixed-income risk and return that provide strong risk-adjusted alpha. Consequently, the pool is tactically managed using duration and yield curve positioning, credit spreads, emerging markets exposure and security selection as levers to generate excess returns and dampen volatility.
Foreign exchange trading is expected to add value, but not to dominate the return of the pool. Signature Tactical Bond Pool will carry a structurally high currency hedge ratio (approximately 80%) that may vary with market conditions.
What are the fund’s characteristics and allocations?
As of January 29, 2016, Signature Tactical Bond Pool had $165 million assets under management, and yielded 1.76% with 7.5 years duration. The current yield results from an underweight position in corporate bonds, given our near-term view that government bonds should outperform on a volatility-adjusted basis.1
The pool’s asset allocation mix was 78% Canadian government and provincial bonds, 13% global government bonds, 1.5% investment-grade credit, 4% high-yield corporate and emerging market sovereign bonds, 0.5% preferred equity, and the remainder in cash.
As outlined in the prospectus, the pool can invest up to 100% in Canadian and global government bonds as well as investment-grade corporate bonds. In addition, the pool has the flexibility to invest up to 10% in high-yield credit and emerging market sovereign bonds2 and up to 25% in preferred equity. The average credit quality of the pool will be maintained at BBB or higher.
What is the difference between Signature Tactical Bond Pool and other Signature fixed-income funds, in particular Signature Global Bond Fund?
Signature Tactical Bond Pool incorporates all the best ideas that go into Signature Global Bond Fund, but the currency exposure is 80% hedged, whereas Signature Global Bond Fund is generally unhedged. Therefore, the pool is recommended for clients who are looking for global bond exposure with less currency risk. Although Signature Global Bond Fund utilizes tactical currency hedges from time to time, from a strategic point of view, currency exposure is broadly unhedged. Currently, Signature Global Bond Fund’s main currency exposures (vs. the Canadian dollar) are: 43% to the U.S. dollar, 19% Japanese yen, 23% euro and 8% British pound.
Signature Global Bond Fund is a portfolio diversifier and is intended for clients to hold together with higher-risk assets such as equities, high-yield credit, commodities, etc. We would not recommend holding it on a stand-alone basis as a comprehensive core fixed-income solution. By contrast, Signature Tactical Bond Pool is designed to be a portfolio that clients can hold as a standalone fixed-income solution, as it offers a well-diversified portfolio that has the ability to generate both income and capital gains with a well-balanced risk-return profile.
Is Signature Tactical Bond Pool an “unconstrained” bond fund?
No, it is not. Over the past six years, in response to the new low-yield environment, non-traditional “unconstrained” funds have proliferated, employing derivative, equity and leverage-based strategies to generate income as if duration risk is bad and levered exposure to risky spreads is good all the time. The performance of these funds, by and large, has been disappointing as they correlate highly with risky assets and do not exhibit fixed-income diversification characteristics.
That is not Signature Tactical Bond Pool’s investment strategy. Although the pool’s flexible approach allows us to respond to market conditions and find the best opportunities to add risk-adjusted value, Signature Tactical Bond Pool is designed to be a high quality and low–volatility portfolio that will invest primarily in high-rated, liquid securities such as Canadian and global government bonds, as well as investment-grade securities, while providing some exposure to high yield, emerging market sovereign bonds and preferred equity.
It is also important to highlight our asset allocation process, which follows a framework that is based on quantitative and qualitative monitoring of available return per unit of risk across all areas of global rates and credit. Additionally, individual asset class experts in rates, investment-grade credit, high-yield credit and emerging markets assess the developments in their respective markets. This analysis is further enhanced by our view on commodities, equities, currencies and the general macro environment assessment that come from Signature’s multi-asset allocation meetings.
What other products are in Signature’s fixed income shelf?
1Yield of a bond (or bond portfolio) is only an indication of return if the bond is held to maturity (with no issuer bankruptcy or default), which is not the case for most bond investments as they are not held to maturity. To put this in perspective, 10-year Japanese government bonds started 2016 with 0.26% yield and have returned 2% in total year-to-date, beating all other higher-yielding government and corporate bonds.
2The limit is currently 10% in order to qualify for the highest product ratings of certain IIROC dealerships. This limit is expected to grow to 25% as these dealers revise their guidelines.