Global diversification hits fixed-income

Strong relative returns in the Canadian market and a high Canadian dollar that has wiped out many foreign investment gains have muted the argument in favour of global diversification. Capital International Group, the Canadian arm of global asset management giant Capital Group, says diversification is beneficial but overlooked in Canadian fixed-income funds.

For most Canadians, particularly retirees, liabilities are in Canadian dollars, which lessens the appeal of pure-global bond funds. Capital International believes there is untapped demand for Canadian-anchored fixed income, which can provide an income stream in Canadian dollars, but also has the ability to diversify into the global fixed-income market to offset concentration risk.

The majority of the fund’s assets will be invested in investment-grade Canadian bonds — government/government agency, corporate and mortgage- and asset-backed bonds. But unlike most Canadian focused fixed-income funds, the fund also has the flexibility to invest in investment-grade and higher yielding bonds from around the world, including developing markets.

Capital International has been steadily expanding its Canadian presence, although one might be forgiven for not noticing. It intentionally keeps a low profile, avoiding much contact with the press and not reporting sales to IFIC, in order to avoid investors with a short-term or market-timing bias. Its parent company manages more than $1 trillion in assets, $167 billion of which is in fixed income.

Mark Tiffin, president of Capital International Asset Management Canada says it wants to bring this expertise to the international side of fixed income because it is not readily available in the Canadian market.

“There are really good Canadian fixed-income managers, investors know who they are. What we bring to the party is the ‘plus,’ our research, experience and scale outside of Canada,” he says. “Most importantly, we want to provide a way for Canadians to diversify that recognizes that their key liability is in Canadian dollars.”

For that reason, Capital International will strategically hedge the currency exposure of anywhere between 50% to100% of the non-Canadian assets in the portfolio.

Tiffin stresses the decision to launch the fund has nothing to do with current market conditions.

“This launch is quite apart from what’s happening from corporate spreads, interest rates and everything else. It’s not a market call. It doesn’t matter whether we launched this fund four years ago or five years from now. It really does start with investor need and our ability to deliver service,” he says.

David O’Leary, manager of fund analysis for Morningstar Canada, says Capital International’s expansion into the fixed-income space in Canada is a natural progression of its understated expansion in Canada.

The firm is highly regarded by analysts, and has a unique management model that it must employ due to the sheer quantity of dollars it manages globally. Capital International will employ numerous managers on one fund, all of which employ different styles and security selection methods.

“Their funds still look different from the index, and they still have produced some admirable results,” he says. “We like what we’ve seen from them so far in Canada. They have an interesting approach to handling their size.”

For example, in the case of the Canadian Core Plus Fixed Income fund, Tiffin says Capital International has more than 78 fixed-income investment professionals across the Capital Group of companies who focus on fixed income in different parts of the world.

“If you have one approach to money management, and all of their portfolio managers were looking for the same type of stocks, you would have a lot of trouble trying to invest the type of money they control,” O’Leary says. “There aren’t enough names to buy, given that you are dealing with a trillion dollars — funds that are investing $5 billion or $6 billion start getting too big and have difficult managing and investing in Canada. They invest globally, which helps, given their size.”

O’Leary notes the strong Canadian market has, to an extent, diminished the ability for international money managers to make the diversification argument for retail investors.

“Certainly it has been muted in the retail space. In the institutional space you are still seeing a greater shift towards foreign equities and diversifying,” he says. “I think the diversification argument is probably a little less pronounced than it would have been if the Canadian markets had been terrible during the last four years.”

O’Leary says Capital International is bucking the trend by being a major international player setting up in Canada. More often he’s seeing successful Canadian asset managers setting up shop abroad to capitalize on interest from foreign investors to get more Canadian exposure.

“What I’ve been noticing a little more is Canadian asset managers looking to land foreign mandates,” he says. “For example, Dynamic Funds recently launched four of their Power funds in the U.K. A lot of Canadian managers have put up some really good money the past five to ten years given the run we have had in Canadian markets so they are looking to capitalize on that and land foreign mandates.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(05/12/08)

Mark Noble