Q2 2019 | Portfolio Commentary

Volume 3 | Issue 2


Worth One’s Salt

To be ‘worth one’s salt’ is to be good or competent at your work.   The expression has roots in ancient Rome, where soldiers received a recurring allowance to buy salt.  This was called their ‘salarium’ and is the etymological root of the term ‘salary.’

Are your investments worth the fees you pay to your manager? This is always a hot-button topic in the investment world, especially regarding stock or equity funds.  What about the fixed-income or bond portion of your portfolio?  Is your fixed-income manager ‘worth their salt?’

A Lesson in Bonds
Finance 101 teaches us that when interest rates go down, bond prices generally go up.  The inverse is also true; bond prices tend to go down when interest rates go up.  In the chart below we can see that the 10-year Government of Canada bond yield has been dropping consistently for the past 30+ years:

Source: Tradingeconomics.com, Treasury Board of Canada

Source: Tradingeconomics.com, Treasury Board of Canada

This decrease in rates has produced fantastic returns for bond holders as they’ve watched the value of their long-term bonds rise. 

TD Canadian Bond Index Price

Source: TD Canadian Bond Index Fund Series I

Source: TD Canadian Bond Index Fund Series I


All Good Things Must Come to an End
Twelve months ago, the prevailing view was that interest rates had bottomed, and the world was about to witness a new rise in interest rates.  Portfolio managers, economists and market pundits all opined that the low-interest rate environment we have long enjoyed was coming to an end.

We did begin to see interest rates rise in North America with the US Federal Reserve and Bank of Canada initiating several rate hikes throughout 2018.  As expected, bond prices fell and yields began to rise.  It appeared the prognostications were accurate and the days of 5% annual returns from bond funds were over.  Or were they?


"Prediction is very difficult, especially if it's about the future." – Niels Bohr
Thinking that interest rates would be heading higher, many investors tried to time their exposure to bonds.  This meant either moving to shorter duration bonds (which are less affected compared to long term bonds), changing the credit style of their bonds, or perhaps completely eliminating them.  In the face of rising rates, some of these moves are rational.

When dealing with something as large and as complex as the global bond market, which is about 30% larger than the size of the stock market[i], forecasting is incredibly difficult.

In early 2019, The Wall Street Journal surveyed economists regarding where they thought US interest rates would be in June and December of that year.  In the graph below, the orange lines show analysts estimates from January, with the actual yield in black.  Oops!

Yield on the 10-year Treasury Note - January 2019 Analyst Predictions

Source: https://www.wsj.com/articles/some-investors-had-hunch-yields-were-about-to-fall-11560072600

Source: https://www.wsj.com/articles/some-investors-had-hunch-yields-were-about-to-fall-11560072600


Investment Spotlight: PIMCO Monthly Income Fund
In an ever-changing interest rate environment, we rely on (arguably) the best fixed income bond manager in the world, PIMCO Investments. By relying on active management, we allowed PIMCO to make tactical shifts for us.

PIMCO is one of the world’s premier fixed income investment managers with more than 2,600 employees, managing $1.7 trillion dollars in fixed income instruments. That pool of money is roughly four times the size of the Canada Pension Plan[i].

The PIMCO Monthly Income Fund is a 2018 Lipper Fund Award winner and won the Fund Data award (based on risk adjusted returns) in the global fixed income category in 2013, 2014, 2015, 2017 and 2018. An impressive resume.

We have used PIMCO Monthly Income since the inception of our Westmount Income and Westmount Growth portfolios. It is an actively managed global bond fund that dynamically adjusts exposure given its macroeconomic view.  With 2,600 active employees, we feel they have a better chance at timing their shifts properly.  The chart below shows their rolling exposure to different types of fixed income over the last 8 years:


Worth One’s Salt – Competent and Deserving of One’s Pay
As fee-based discretionary portfolio managers, we are product agnostic. We are not compensated by any of the investment products we include in our portfolios, thus eliminating any biases or self-interest in our investment selection.  We can research and choose almost any available investment tool to gain an edge for our clients.

One of the decisions we make when choosing funds is whether to pay a higher fee for active (human) management or to ‘go passive’ with a low-cost index fund.

Mutual funds have received a lot of bad press over the years for high fees and mediocre returns, and rightly so.  The latest SPIVA[i] report showed that more than 75% of Canadian equity fund managers trailed the S&P/TSX composite index benchmark in 2018.  There are some great active funds with excellent managers that do deliver, but with higher fees, most struggle to consistently outperform a low-cost index alternative.

PIMCO is a counter-example and an outlier in this instance.  Despite having a fee 9 times higher than the ultra-low-cost Vanguard Canadian Aggregate Bond ETF (0.85% PIMCO vs 0.09% Vanguard), PIMCO has almost tripled the return of the lower cost option.  In fact, PIMCO Monthly Income Fund has had positive performance in every single year since its inception in 2011.

Source: PIMCO Monthly Income Monthly Fund – Monthly Fact Card - 31 Mar 2019

Source: PIMCO Monthly Income Monthly Fund – Monthly Fact Card - 31 Mar 2019


A $10,000 investment in PIMCO would be worth $17,900, eight years later versus $12,800 if invested in Vanguard.

Source: Morningstar AWS – PIMCO Monthly Income F (PMO205) vs VAB

Source: Morningstar AWS – PIMCO Monthly Income F (PMO205) vs VAB


In the current environment of uncertainty surrounding global interest rates, now is the time for active fixed-income management. A big part of our value as portfolio managers lies in identifying and discerning the best options on behalf of our clients. We spend a lot of time in research, because we want you to have the best. After thoughtful consideration, we are proud to include PIMCO because we think they are more than worth their salt. 


Changes to the Portfolio
We don’t believe any changes are warranted in our Westmount Income and Growth Portfolios at this time. We are well positioned to take advantage of any further rally and equally ready for any pullback.  Sometimes part of the investment process requires doing nothing and holding steady.

We would be happy to discuss your portfolio with you in advance of your next review meeting; please do not hesitate to contact us.

Warm regards,

Lorenzo Pederzani, CFA, CFP®, FCSI®  | Portfolio Manager
HollisWealth®, a division of iA Securities Inc.

Matthew Evans, CFP®, CIM®  | Portfolio Manager
HollisWealth®, a division of iA Securities Inc.

This information has been prepared by Matthew Evans and Lorenzo Pederzani who are Portfolio Managers for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.