Is this RBB fund for you?

More fund companies are deciding they want to get into real return bond (RRB) funds, with Dynamic the latest firm to make a move. On Oct. 7, unitholders in Dynamic Global Bond Fund approved a management proposal to change the fund’s mandate by converting it into a real return bond fund.

This is a drastic change for Dynamic Global Bond. Until now, the fund has invested in international debt securities and Canadian bonds denominated in foreign currencies. It was structured so as to be 100 per cent RRSP eligible despite the fact it has virtually no exposure to the Canadian dollar, with euro bonds (45.9 per cent) and Japanese yen bonds (32.4 per cent) dominating the portfolio at present.

Appeals to investors
The fund has never been a big hit for Dynamic, however, with under $17 million in assets and below-average performance results over most time periods (the fund shows a five-year average annual compound rate of return of just 1.7 per cent). The company obviously thinks that conversion to a real return bond fund will be more appealing to investors.

This brings to six the number of real return bond funds available to investors. That’s a big cnge in less than two years. For almost a decade, TD Real Return Bond Fund had the field all to itself and the monopoly allowed it to build a $1.3 billion franchise.

However, in April 2003 Mackenzie Financial decided it too wanted a piece of the action and launched the Mackenzie Sentinel Real Return Bond Fund. Two months later, the Renaissance Canadian Real Return Bond Fund made its debut, followed in December by the SEI Real Return Bond Fund. SEI also offers a pooled fund with a minimum investment of $150,000 and the Genus organization has one with a $300,000 minimum.

Among the funds available to the average investor, the TD entry still leads the pack. It has the best return for the year to Sept. 30 at 13.8 per cent, offers the lowest MER at 1.65 per cent, and is no-load. It has also proven its staying power over time, with a five-year average annual compound rate of return of 9.6 per cent.

The fund has done better than the Scotia Capital Universe Bond Total Return Index, by a substantial margin, however its performance lags that of the Scotia Capital Real Return Bond index, in large part because of the MER. The fund’s portfolio consists mainly of Government of Canada issues with varying maturity dates although it also holds some Province of Quebec bonds.

Look for monthly distributions
However, if steady cash flow is important to you the Mackenzie Sentinel fund may be more appealing. Its the only one that makes monthly distributions. The TD funds payments are quarterly.

Real return bonds have been very strong performers in recent years. However, they showed some signs of weakness in September so don’t invest on the basis of historical performance alone. Talk to a financial advisor about whether a fund of this type is appropriate for your long-range objectives.