The fund allows investors to take advantage of more opportunities for potential incremental return gains.
- This fund has the flexibility to look beyond the traditional scope of most core Canadian fixed income funds;
- Instead of the traditional ‘asset type’ view of diversification, this fund mitigates volatility and seeks to maximize payoffs by seeking to diversify types of risks, and thus, opportunities for gains.
From the manager: “We look at fund structure differently, as being constructed with allocations to various risks as opposed to allocations to various assets. Risk and opportunity can be seen as opposite sides of the same coin. The fund’s investment process searches for risks that are asymmetrically skewed in investor’s favour. The Tactical Bond fund has been structured such that it has access to a broad range of risk categories and assets across geographical locations. Having a broad mandate increases the likelihood of finding asymmetrically favourable opportunities for investors.”
The Tactical Bond fund can certainly be viewed as a core Canadian fixed income holding. Despite its wider mandate and tactical yield enhancement goals, it will remain highly diversified by sector, term and issuance class, and the majority of its holdings will be in Canadian investment-grade bonds. With the flexibility to hold both traditional and non-traditional fixed-income securities, it has the levers needed to be nimble in response to market developments, wherever and whatever they may be – thus the name ‘tactical’. For example, the fund is able to hold foreign bonds when opportunities outside of Canada look good.
Broader access means more opportunities for the fund to make gains and deliver better returns.
From the manager: “The next opportunity can come in any asset class, any sector of the curve or any geographic location. The goal is to have the widest possible universe of investment opportunities and to be prepared to take advantage of asymmetric risks when they present themselves. The fund can then invest prudently, within a robust risk management framework, increasing the chances and frequency of benefitting from incremental return gains.”
When it comes to investing, risk and opportunity are two sides of the same coin. In that way, all investing is risk investing – be that duration risk, credit risk, inflation risk or volatility risk. The asset class the fund invests in is simply the conduit through which it assumes the risk. As such, the focus on risk allows us to more effectively consider how the portfolio will respond to changing market conditions.
An asymmetric risk appears when markets, and market assets, become dislocated from their intrinsic values, making the asset more or less risky than usual relative to another asset. By focusing on finding asymmetric risks, we can choose to invest in assets where this dislocation from its intrinsic value puts the odds of a favourable outcome (i.e., incremental returns or risk mitigation) in the favour of investors. The more of these asymmetric risk opportunities the fund can invest in, within a framework of robust risk management, the greater its chances of providing increased incremental returns to our investors.
From the manager: “We’ve seen these market anomalies expressed via inverted curves and negative yields. When we see markets at extremes like this, they’re more likely to move in one direction than the other. We can then choose to invest where the odds are tilted in the investors’ favour to give them a reasonable, sometimes good, chance of being well rewarded.”
Every fund managed by GLC (and any of its divisions, including Portico) applies a responsible investment approach. Specifically, an integrated approach in which environmental, social and governance (ESG) factors are always considered when investing across all strategies at Portico.
From the manager: “Many Canadian investors want their investments to promote positive change and a higher level of environmental and societal goals, and bond issuers are taking notice. The dialogue between investors and issuers, such as Portico, continues to increase. Portico’s management team always looks at risks within portfolios; if ESG risks are left out, a potential risk could be missed.”
The Tactical Bond (Portico) strategic view and tactical overlay are interconnected: the fund’s strategy determines asset selection (including non-traditional assets); and, its tactics are determined by the trading and the market opportunities it discovers, including how and when it uses ETFs and derivatives.
No. The fund is designed to be responsive to market conditions as they change. As a result, it will always seek opportunities that optimize the risk/return for the investor, appropriately using both traditional and non-traditional fixed income securities to do so.
The Tactical Bond Fund is designed to be a core Canadian fixed income holding that remains within certain well-defined risk parameters. It will tend to be more volatile than say, a government of Canada bond fund. When compared to a core bond fund, it’s risk parameters will be similar, but the Tactical Bond fund has the flexibility to take on higher conviction positions in a broader universe of traditional and non-traditional fixed income holdings, including foreign bond holdings. As a result, these additional market opportunities can mitigate the portfolio’s risk through diversification of assets, while at other times, they can increase the volatility with enhanced opportunities for gains.
Designed to be a core Canadian fixed income fund, the fund will maintain a majority of its holdings in investment grade Canadian bonds – a minimum of 60% at all times. Unless exceptionally bearish on the Canadian market, the fund is most likely to hold between 70% and 100% Canadian holdings. The fund has the flexibility to hold foreign funds when opportunities look favourable.
With respect to non-traditional fixed income assets, including ETFs and derivatives, they will comprise between 0% and 20% of the fund’s total holdings on average. ETFs and derivatives are not themselves an asset class, but rather a conduit to a given asset class. Therefore, they will primarily be used for their liquidity benefits to move quickly in and out of exposures to take advantages of changing market conditions, both for risk mitigation and/or to capture incremental gains. This fund will not be using ETFs as a passive investment tool, rather they will be used as an active portfolio management strategy and conduit to gain exposure in a given market or asset class where an attractive opportunity presents.
While Tactical Bond (Portico) intends to be fully invested in attractive, yielding fixed income opportunities, cash and short-term bonds can be held for liquidity to deploy in emerging opportunities, or for risk mitigation. The fund can hold up to 25% cash, but it is unlikely to hold more than 5% at any given time.
From the manager: “Opportunities can appear suddenly and disappear just as quickly. As such, the fund needs to be prepared to get into risks when prudent, with tactics for exiting risky positions once they’re no longer asymmetrically in investors’ favour. This is why the Tactical Bond mandate includes the ability to use derivatives and exchange traded funds (ETFs) – for liquid access into and out of opportunities.”
The fund can hedge currency when there is an opportunity to benefit the investors by mitigating risk and/or enhance returns.
The average credit quality and duration of the fund will vary according to changing market conditions and will reflect where the portfolio management team feels the best opportunities are in the marketplace. This fund will primarily be invested in investment grade bonds, seeking out high-yield bond opportunities only when market conditions present an attractive opportunity.
The Tactical Bond fund is designed to take advantage of the maximum number of opportunities in the most efficient way possible. There’s never a bad time to invest this way.