Don’t be mislead by past performance

As investors continue to bail out of mutual funds, fund companies are desperately looking for any new products that can rekindle interest and attract new money.

That appears to be the main motivation behind the launch in June of a new fund from CIBC-subsidiary CM Investment Management.

It became the latest company to try to grab a share of the real return bond fund market. The Renaissance Canadian Real Return Bond Fund was launched on June 2, joining the TD Real Return Bond Fund and the new Mackenzie Real Return Bond Fund as the only funds of this type in Canada.

Inflation less of a concern
Renaissance says the fund is “ideally suited to fixed-income investors concerned about rising inflation.” A few months ago, when inflation was running at more than 4 per cent and the Bank of Canada was threatening more interest rate increases to combat it, that approach would have found a receptive audience. But things change very quickly these days. Today, inflation appears to be of less concern than a slowing economy and possible deflation.

As a result, some of the lustre has come off real return bond funds. The TD and Mackeie entries each lost ground in June, during a period when virtually all other Canadian bond funds were gaining.

If you study the results of the past year, TD Real Return Bond looks very attractive, with a gain of 15.2 per cent (to May 31). But unless there’s another shift in our economic direction, we won’t see a repeat over the 12 months. Regular bond funds are likely to outperform the real return type, which is why we switched our rating on the TD fund from a Buy to a Hold in the July issue of our Mutual Funds Update newsletter.

Now is not the time
Investors who focus too much on the past may be tempted to try the new Renaissance entry. My advice is to stand clear for now. The time will come again for real return bond funds, but this isn’t the moment.

Another fund that will not do as well in the next 12 months as it did over the past year is the Phillips, Hager & North High Yield Bond Fund. The fund had a gain of 13.4 per cent in the year to May 31, but one of the managers confided to me that it is “mathematically impossible” for that kind of return to be duplicated in the coming 12 months. The reason: the very wide spreads between corporate issues and government bonds have narrowed recently, which has resulted in windfall profits for all funds of this type. The manager described the past year as “an anomaly”.

So what’s the outlook for this fund? “I would say that 8 per cent is a number I can live with for the next year,” he said. “Going forward, an 8 per cent to 9 per cent annual return is a reasonable target over the longer term.”

Those numbers are a far cry from the recent results, but most people would be more than content with that kind of return in the current investment climate. This fund currently pays quarterly income distributions of 15c a unit, plus a capital gains distribution at year-end. The holdings are a cut above many other high-yield bond funds, with a focus on securities that have a BBB or BB rating, so the risk of default is relatively low. It’s a good fund to consider for a RRIF if you can handle the higher risk. But don’t expect the next year to be as good as the one just past.