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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
Q1/5 BG Canadian Intrinsic
Q1/5 MB American Equity
Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
Q2/3 Batterymarch US Eq
Q1/3 Saxon Stock
Q1/3 BG Balanced
Q4/2 Mawer New Canada
Q4/2 Perigee T-Plus
Q3/2 PH&N Dividend Inc
Q3/2 PH&N Bond
Q2/2 Leith Wheeler Cdn Eq
Q2/2 Perigee Diversifund
Q1/2 PH&N Cdn Equity
Q1/2 Mawer U.S. Equity

PH&N Bond Fund

The Phillips Hager & North Bond fund tops our list of frugal bond funds with consistent first quartile performance since 1998. From January to the end of September, the fund was up 6.4%, and over the past five years the fund has returned an average of 6.6% annually. Over the same period the average Canadian bond fund returned 4.9%, while the SCM Universe Bond Total Return index rose an average of 6.8% annually. Indeed, the fund has kept pace with the index since its inception in 1970.

Managed by Scott Lamont, a member of the PH&N Fixed-Income team, the fund invests mainly in government and high-yield corporate bonds rated BBB or above (using the Dominion Bond Rating Service scale), as well as in Canada Mortgage and Housing Corporation backed mortgages. A variety of strategies are used, reflecting the manager's belief in strategy diversification as a way to improve the risk-return profile of the fund. One aspect of this approach is active management, which leads to frequent trading and, therefore, to a high turnover. Most of the activity currently involves positions in government bonds. Generally, the fund is managed with the objective of keeping the average term to maturity between seven and twelve years.

It is anticipated that fund performance will be much more modest in the coming year as the recent bond market rally runs out of steam. Factors cited by Mr. Lamont to support this view include the recent extreme levels of favourable investor sentiment, which has driven yields down to very low levels. It is expected that yields will start to rise as confidence returns to the equity markets and interest rates increase domestically. The fund aims to maintain a low-level of corporate exposure while at the same time being very selective about those issues which are included in the portfolio. This reflects a concern about the continued weakness of corporate issues.

The portfolio's makeup at the end of the third quarter does, in fact, indicate an expectation of increases in interest rates, with short and mid-term maturities being favoured. Long bonds make up only 28% of the fund's assets. However, the concentration in short-term issues is much less now than it was at the beginning of the year. The portfolio's duration has indeed been creeping upward over the last three quarters which indicates an increasing sensitivity to interest rates changes. At present, the portfolio has an average term to maturity of ten years and a duration of six years. Taken as an aggregate, the portfolio's effective yield is just under 5%.

Broken down by issuer type, the fund holds 44.6% of its assets in Canadian government bonds, 17.7% in provincial bonds, 28.3% in corporates, 1.5% in mortgages, and 8.0% in cash. These allocations have remained essentially stable during the third quarter. The largest corporate issuer in the fund is Ford Credit Canada, representing 2.6% of the portfolio. One of these bonds is also the largest single corporate issue held, accounting for 2% of assets. 53% of the bonds held are rated AAA, while only 2.6% have a BBB rating. The fraction of BBB rated bonds is down from 6.6% at the end of the second quarter.

Considering only the corporate part of the portfolio, the breakdown is 14% AAA, 4% AA, 74% A, and 8% BBB (expressed as a fraction of total corporate holdings). According to the Dominion Bond Rating Service at least 9 of the 42 distinct corporate issuers in the portfolio currently have a negative ratings outlook, representing 10.6% of net assets. On the other hand, 21 issuers have a stable outlook. During the third quarter the corporate bonds delivered good returns for the fund. Cited by the manager as being particularly beneficial were the telecom and financial holdings.

Finally, it is worth noting that the PH&N Bond fund's MER is not only lower than that of most actively-managed bond funds, it is also lower than that of most bond index funds. Combined with its superb long-term performance record, this fund has more than justified its five star rating. Though its minimum investment level may be too high for some, it should be clear that the PH&N Bond fund is worthy of inclusion in conservative income-oriented portfolios.

FF: Q3 2002



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...