Income Fund

December 31, 2024

Market Context

• The Canadian bond market rose 3.9% in 2024 (income and capital appreciation).
  
• Bond yields rose over the first half of the year but pulled back in the second half. All said, the benchmark 10-year Government of Canada yield was little changed over the period, finishing the year at 3.2%, up from 3.1% in January.
  
• Canadian stocks rose 22.2%. Technology, financial services, and consumer staples were areas of strength, while the telecom and real estate sectors declined.
  

Portfolio Specifics

• The fund rose 6.4% in 2024. The bond component of the portfolio (76%) performed well and outpaced the broader market. Our fixed income strategy profited from opportunistic positioning across the yield curve, where we favoured bonds that benefited from a steepening curve (whereby short-term rates declined more significantly relative to longer-term yields).
  
• Our corporate bond holdings were an area of strength. A solid U.S. economy and lower inflation led to strong business confidence and resilient consumer spending, which was supportive of this asset class. Moreover, investor demand remains strong and credit markets were supported by a slower pace of issuance. Our high yield investments (5% of the fund) were a standout. Overall, corporate bond valuations are looking expensive, however, and we have a lower-than-normal weighting in the sector as a result. We currently favour banks, REITs, and utilities.
  
• Our manager, Connor, Clark & Lunn, believes the pace of interest rate cuts is set to slow, although fundamentals suggest Canadian yields have farther to fall relative to their U.S. counterparts. CC&L will continue to manage duration opportunistically in this environment. We also have a small position in real return bonds (which pay a return adjusted for inflation), which offer protection in the event of a resurgence in inflation.
  
• The fund’s equities (24% of the portfolio) were the strongest performers in the year. Our financial services and consumer holdings saw strong gains. We remain focused on owning dividend paying companies that can deliver above-average earnings growth. As we look toward 2025, CC&L expects U.S. economic growth to remain robust, which should support the Canadian economy as well. Recently, we added a few cyclical companies (commodities and financials) that typically outperform in the later stages of the economic cycle.
  
• The fund paid distributions totaling $0.38/unit in 2024.
  

Positioning

• Despite the increased clarity following the U.S. election results, the economy could face a range of potential scenarios. Our focus, as such, remains on high-quality companies.
  
• Stocks make up 24% of the fund and remain an important source of diversification.
  

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