McLean Budden Fixed Income
Over the past 15 years the McLean Budden
Fixed Income fund has returned an average of
9.05% annually, closely tracking the SCM Bond
Total Return index, which had an average annual
gain of 9.87% during the same period. In fact,
over the past five years, the fund's performance
before fees has slightly exceeded that of the
index. The fund yielded 7.69% each year on
average compared to the index's 8.3% return. The
difference of 0.61 percentage points is smaller
than the fund's 0.65% MER.
The fund is under the direction of a team of
seven fund managers led by Peter Kotsopoulos. It
invests in a mix of Canadian federal, provincial,
and corporate bonds rated BBB or greater on the
Dominion Bond Rating Service (DBRS) scale.
Corporate bonds are restricted to a higher
minimum debt rating of A, among other risk
The management team emphasizes diversity
in its approach to running the fund. The fund's
duration, which is a measure of its sensitivity to
interest rate fluctuations, is actively managed to
reflect expected changes in interest rates.
Similarly, the portfolio's term structure, which
describes the relative mix of short-term, medium-
term, and long-term bonds, is adjusted in
anticipation of changes in the shape of the yield
curve. Usually, the team aims to maintain an
average duration of between four and seven years
(or an average term-to-maturity of seven to twelve
years). Besides interest rate anticipation, the fund
also aims to capitalize on the higher yields
available from corporate and provincial bonds by
actively adjusting the relative weights of these
sectors according to market conditions. For
example, if corporate yield spreads widen in
general then the fund will tend to allocate more of
its portfolio to corporate bonds.
By holding some Canadian bonds that make
payments in U.S. dollars, the fund takes limited
advantage of differences between Canadian and
U.S. interest rates. The strategy also allows the
fund to take advantage of currency fluctuations.
U.S.-pay bonds may make up no more than 10%
of the fund's portfolio.
With such diverse strategies in play, the fund
is very active. As a consequence, and in
combination with prevailing market conditions,
the portfolio's turnover rate has, over the last five
years, averaged 131%.
At the end of June the fund's yield was 3.8%
and the portfolio's duration was essentially on par
with the SCM index's 6.4 year duration. This
means that the fund was just as sensitive to
interest rate fluctuations as the index. According
to Mr. Kotsopoulos the fund's portfolio of
corporate bonds had a lower overall duration than
the corporate components of the index. In
addition, the corporate bonds were, on the whole,
of higher quality than those in the index.
However, this last point isn't a surprise since the
SCM index includes BBB-rated bonds whereas
the fund does not.
At the end of the second quarter the fund
held 84 bonds from 46 issuers. Almost 40% of
assets were held in Government of Canada bonds.
A variety of provincial and municipal bonds with
a debt rating of A or better accounted for 22% of
the portfolio, and 34% of assets were held in
corporate issues. Of the assets held in corporate
bonds 13% represented issuers with a AAA
rating, those with a AA rating made up 51%, and
A-rated issuers accounted for 34%. The fund held
0.58% of assets in cash at the end of June.
During the first half of the year the fund
adopted a defensive posture, and has been taking
profits following a strong 4.2% rally in the second
quarter. Notable changes during the first six
months of 2005 include the sale of General
Motors Acceptance Corporation bonds following
the downgrading of GM's debt rating late last
year. The fraction of U.S.-pay Canadian bonds
also increased from 1.3% to 4% of assets as the
fund purchased additional medium-term Ontario
U.S.-pay bonds at the expense of medium-term
Manitoba and British Columbia issues. Despite
these changes the portfolio's credit and industry
sector weights remained largely unchanged.
Going forward Mr. Kotsopoulos expects that
interest rate increases south of the border will
come to an end in the fall of this year. Any
further tightening, he explains, is unlikely because
of the risks it would pose for continued economic
growth. Because of this expectation the fund has
recently started buying back into medium-term
bonds, which it had exited earlier in the year.
With a low 0.65% MER the McLean Budden
Fixed Income fund is hard to beat. The fund is
available everywhere in Canada for a $10,000
minimum investment. It can be purchased
through dealers or directly from McLean Budden.
A low MER and an exemplary record of
performance makes the McLean Budden Fixed
Income fund suitable for most frugal investors.
FF Q2 2005