Bond funds with good returns
It’s become an article of faith among investors: over the long haul, stocks will outperform bonds.
Oh really? Well, consider this startling fact. Over the past 20 years (to Jan. 31), the average Canadian bond fund returned 9.4 per cent annually. The average Canadian equity fund returned 9.3 per cent. Sort of blows that theory out of the water, doesn’t it?
The obvious conclusion is that you sacrifice very little return potential over the long term by including a higher percentage of bonds in your asset mix, and you greatly increase your personal comfort level by reducing your risk exposure in tough times. But for some reason, many people still can’t accept what seems to be heretical thinking.
Of course, bonds have fared particularly well recently, thanks to low interest rates and a poor stock market. All the expert thinking now is that bond prices are likely to fall in the coming months, as interest rates are moved higher.
That could certainly happen. But remember, the conventional wisdom suggested exactly the same outlook a year ago at this time. The reality proved to be quite different.
I personally feel that a good bond fund is a worthile addition to a portfolio at any time, as long as you plan to retain your units for several years. We’ve owned the Phillips, Hager & North Bond Fund for over a decade, through good bond markets and bad, and been rewarded with an average annual gain of 8.5 per cent over that time. We certainly aren’t complaining.
There are many bond funds available to investors. I prefer no-load funds with relatively low management expense ratios, as they provide the best return for your money. Here are two that recently passed their third anniversary and therefore qualify for a formal rating in my On-Line Mutual Funds Database. Both received a $$$ rank (out of four)
RBC Advisor Canadian Bond Fund:There is no fund quite like this in the original Royal family. It was created at the specific request of brokerage firm RBC Dominion Securities to fill a perceived gap in the fixed-income options offered by the company. The fund mainly follows a passive index strategy, tracking the DS Bond Index. However, the manager will also do some limited trading to enhance value. The result has been very good so far; the fund returned 6.6 per cent in the year to Jan. 31, well above average for the Canadian Bond category.
That was much better than the no-load Royal Bond Fund and slightly ahead of the return posted by the Royal Canadian Bond Index Fund. Note that the MER on this fund is only 0.88 per cent, much less than that of the Royal Bond Fund, because of the semi-passive management style. Although a commission is payable if you buy any of the RBC Advisor funds, you may want to take a close look at this one, especially for a registered plan. Ask your broker or planner to acquire it on a zero front-end load basis. He or she will receive an annual trailer fee as compensation.
Scotia Canadian Bond Index Fund:This is one of the bright spots in the Scotia Funds line-up and if you are a client of the bank, you would be wise to put some of your money here. The fund tracks the performance of the Scotia Capital Universe Bond Index, and while the results fall short of matching the Index’s return they are well above average for the Canadian Bond category. Over the three years to Jan. 31, the fund produced an average annual gain of 7.6 per cent compared to 6.9 per cent for the category. One year return was 6.6 per cent, again well above the category average but nowhere near as good as the 7.6 per cent gain for the Index. The fund has a modest MER of 1.02 per cent and is no-load. Safety rating is average.