Fund won’t repeat top performance

You won’t often find a fund manager saying that performance is going to worsen, but here’s an exception.

The Phillips, Hager & North High Yield Bond Fund had a gain of 19.7% in the year to June 30, 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% is a number I can live with for the next year,” he said. “Going forward, an 8% to 9% 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 secities 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.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that offers practical advice on portfolio building and fund selection for investors.