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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 controls.

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



Disclaimers: Consult with a qualified investment advisor before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...