On few occasions have we seen a fund that dominates its category for more than seven years in a 10-year period. But such funds do exist—even in the bond fund category.
We’ve often expressed our distaste for bond and other income funds. That’s because you stand a fair chance of beating most of them by investing in fixed-income securities directly. These funds offer little more than a hired pro speculating on interest rates on your behalf. But if that’s what you want, here’s a fund that stands above most.
RBC Bond Fund’s (Fund code Series D: RBF601 (NL)) objective is to provide above average, long-term total returns consisting of interest income and moderate capital growth by investing primarily in high-quality fixed-income securities issued by Canadian governments and corporations. This it has generally done by a comfortable margin.
One of the top fixed-income funds
These past 10 years, the fund’s compound annual growth rate is 4.0 per cent, which ranks among the top six per cent of the Canadian fixed-income category. Over the same period, the average fund in the category had an annualized return of 3.1 per cent. Most of the fund’s annual distributions have been in the form of interest.
The fund invests primarily in a well-diversified portfolio of fixed-income securities. It has 50.4 per cent of its assets invested in government bonds, 41.9 per cent invested in corporate bonds, 6.4 per cent in short-term investments (cash and other) and 1.3 per cent in other bonds.
Looking at compound annual returns over the last one-, three-, five- and 10-year periods, RBC Bond Fund has performed in the top quartile of its category in all periods, except in the last one-year period, in which it was a second-quartile performer. On a calendar basis, the fund was a top-quartile performer in seven of the past 10 years ended Dec. 31, 2020, a second-quartile performer in two years, and a third-quartile performer in one year.
These past 12 months, the fund’s return of 0.2 per cent ranks in the top third of its category. That’s a pretty good performance in a time period when the average fund lost 0.4 per cent.
Volatility is higher than average for a fixed-income fund, but quite low compared to an equity fund. The standard deviation is just 5.2.
Trading is the secret to success
You might wonder how a fund that invests a good portion of its portfolio in government bonds and avoids junk bonds can manage such a relatively strong performance. The answer is simple—trading.
The fund’s prospectus lets potential unit-holders know that its investment strategies involve trying to take advantage of the overall direction of interest rates, expected changes in interest rate spreads between different segments of the bond markets, and anticipated changes in interest rate spreads associated with changes in individual credit ratings or quality perceptions.
These strategies can be risky. But RBC’s fixed-income team has a strong record with them, as the fund’s historical performance shows. But the risk still remains.
We still think you’re better off to keep control of your fixed-income investments through bonds or GICs. You’ll know when they mature, and you’ll have the control you need to make your portfolio suit your personal needs.
If you want a fund that speculates on interest rates, however, there appears to be few better than RBC Bond Fund.
This is an edited version of an article that was originally published for subscribers in the May 14, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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