Income Fund Commentary

Market Overview

The Canadian bond market eked out a small gain to start the year – the DEX Universe Bond Index returned 0.7% in the quarter. Corporate and provincial bonds continue to outperform federal government securities.
The Canadian stock market rose 3.3%, with defensive, dividend-paying stocks once again providing higher returns.

Portfolio Specifics

The fund continues to perform well in a low interest rate environment. Key areas of added value have been: (1) an emphasis on corporate and provincial bonds over federal government bonds; (2) strong security selection (banks and insurance bonds and no direct exposure to mining stocks); and (3) a higher than normal weighting in dividend-paying stocks.
The manager, Connor, Clark & Lunn, feels that central banks will continue to hold interest rates down, which will lead to increased demand for corporate bonds. CC&L notes that spreads (the difference in yield between corporate and government bonds) are higher than average and believes they will continue to narrow (leading to further price gains, albeit modest).
CC&L continues to see opportunities in insurance and bank bonds. As well, they feel certain provincial bonds offer attractive value, notably Ontario 10-year bonds, which carry a 1% yield premium over Canada bonds.
Dividend-paying stocks are providing a valuable source of income. Two-thirds of the funds equity holdings have yields of 4% or greater, and the quality of holdings (and thus sustainability of payouts) remains high.
The fund paid a distribution of $0.10/unit at the end of March. If interest rates stay near historic lows or fall further, the distribution may be reduced in future quarters. For further details, read our related blog post.

Notable Transactions

A slight trim was made to the high yield bond portion of the portfolio, with the proceeds invested in higher quality corporate bonds.
On the stock side, a few of the fund’s utilities and REIT holdings were sold or trimmed on strength (Primaris REIT, Granite REIT, Algonquin Power), while Thomson Reuters and Constellation Software were purchased.

Positioning

Fixed income holdings remain focused in corporate and provincial bonds.
The portfolio’s average term to maturity and duration is slightly lower than normal as a defense against an eventual rise in interest rates.
Dividend-paying equities comprise about 30% of the fund (the long-term target is 25%) as the outlook for stocks remains positive in CC&L’s view. Global growth is picking up and corporate earnings remain robust. Focus is on companies with rising dividends and strong balance sheets.