During our annual portfolio reviews and other conversations with our clients, we frequently are asked questions about the performance of our in-house fixed income pool, (“the Fund”). I thought it would be useful to provide some answers to these frequently asked questions.
Why do I own the Fund?
The fund gives our clients a very low volatility managed product that can offset the sometimes alarming movements of the stock market. The fund holds investment quality bonds and preferred shares that change slowly in value, mostly because of changes in interest rates. When the stock market falls, many investors sell stocks and buy bonds, which makes stocks and bonds highly uncorrelated or even inversely correlated-that is, bonds tend to rise in value when stocks go down. We view the fund as a shock absorber to cushion portfolio performance in times of market turmoil. Since inception of the fund, we have never had an underlying holding default on any payment of interest or principal. Currently the fund has 121 holdings. It is our practice to hold all the bonds we buy until their maturity date. This means when we purchase a bond we lock in the yield to maturity, and that will not change regardless of movement in interest rates.
Usually the Fund seems to be below its initial price of $10.00. Have I lost money?
The fund has been valued in the range of $9.05 to $10.00 for the past 45 months. However, during this time the fund has made regular cash distributions of its earnings into your account. Over the last two years, the following distributions have been made:
September 2023 $.0913
December 2023 $.0631
March, 2024 $.1081
June, 2024 $.0924
September 2024 $.0935
December 2024 $.0770
March, 2025 $.1150
June, 2025 $.1013
Total $.6733
On average this amounts to $.337 per year, or a cash on cash yield of 3.37% per year for those who purchased units at $10. Many of our clients paid less than $10, depending on their time of purchase, and will therefore have a higher yield. For example, someone who bought units at $9.50 two years ago would have a cash on cash yield of 3.55% per year over that period, not taking into account capital appreciation. Units were valued at just over $10 on September 9th, the last valuation date.
Why is the Fund better than a bank GIC or a savings account?
The Fund offers the following advantages:
- Liquidity without charge or penalty within a maximum of five business days. You can get your invested funds back within a few days without suffering any loss of interest.
- Automatic reinvestment. You do not have to worry about reinvesting your funds upon maturity.
- Slower reaction to changes in interest rates. When bank prime rates go down, GIC interest rates change the same day. The Fund owns bonds with maturities ranging out to x years, so changes in interest rates do not result in a sudden loss of yield. In fact, dropping rates will generally increase the market value of the bonds in the Fund.
- Generally higher yield than bank GICs with similar risk. While the Fund is not insured against loss of capital, the highly diversified holdings and their overall quality make it a low risk alternative. In general bonds will have higher interest rates than GICs of a similar duration, offering better yields to our clients.
We hope that this information will help you understand this important part of your portfolio better. Your Portfolio Manager would be happy to discuss this with you should you want more information.
David Baskin
Chairman