Pender Corporate Bond Fund - Review of 2011

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After a volatile year for markets, 2011 represents a good data point to assess the strategy and performance of the Pender Corporate Bond Fund.

The Fund’s mandate is to take an opportunistic approach to buying investment and non-investment grade fixed income securities of North American corporations. Its objectives are to preserve capital and to generate returns though current income and capital appreciation while maintaining low volatility.

Pender Corporate Bond Fund has the lowest Maximum Drawdown amongst peers
Whenever he is analysing a potential investment, Matt Shandro the Portfolio Advisor of the Fund, has stated that he is “… concerned about the downside risk and the preservation of capital.” Given the market volatility in 2011, how did the Fund reduce downside risk? We looked at Maximum Drawdown– the maximum amount of value lost by a fund at any point during the year – for a selection of Canadian corporate bond funds.

Starting with an investment of $10,000 on January 1, 2011 we tracked each fund’s performance from January 1 to December 31, 2011. By identifying peak and trough levels during the year, we were able to determine each fund’s Maximum Drawdown. We found that the Pender Corporate Bond Fund had the lowest Maximum Drawdown for the year, -2.5%, indicating that we are succeeding in our goal of keeping downside risk to a minimum.

To see a chart with the full data analysed, please click here.

Protection when Interest Rates rise
In the Pender Corporate Bond Fund, investors are offered a level of protection from the prospect of a rise in interest rates with a short portfolio duration. Mr. Shandro maintained an average duration on holdings in the Fund of just 2.43 years for 2011, positioning the Fund to better withstand an increase in rates over other funds.

However the shorter duration does not compromise potential returns. The yield of the Fund’s portfolio was not penalised and averaged 5.87% in 2011. In short, investors are being “paid to wait” for a change in rates.

“In terms of how I am thinking, I am sufficiently prepared for muted economic growth. The duration of the Fund is exceptionally low. I am striving to get my capital back as quickly as possible. I also have a lot of cash on hand (average for 2011 – 14.9% of the Fund). Having a margin of safety is very critical to me.”

Specialist Portfolio Advisor, Matt Shandro
Independent expert credit analyst and price-setter – Mr. Shandro is an expert credit analyst with over 15 years of experience in fixed income. He undertakes his own fundamental analysis of all issuers. He is a value investor and uses this knowledge to negotiate the price he is willing to pay for a bond and usually doesn’t participate in the new issue market.

Ratings agnostic – Mr. Shandro uses the ratings set by credit agencies as a small part of his investment process. His independent analysis uncovers high quality but underrated issues. Experience has shown that many of the companies he finances not only redeem the debt ahead of time but are also re-rated by the agencies.

To quote a recent article in Advisor.ca1 “By the admission of the people who issue them, these ratings are worthless.” In reference to Moody’s, Standard & Poor’s and Fitch claim that “their rattings were simply “opinions”,” when testifying before the US senate with regard to the AAA ratings given to much of the debt at the root cause of the credit crisis of 2008.

Unique access – In addition, Mr. Shandro has access to unique opportunities not available to retail investors. This is partly due to the small size and nimble nature of the Fund, which benefits from buying smaller bond issues with better characteristics (higher yields and shorter duration) that are too small to be of interest to larger fund managers, and partly due to the supply network that Mr. Shandro has built up.

Example – Mr. Shandro was the only fund manager in Canada to be invited to participate in a recent Miramax issue. Having concluded that cash flow covered 70% of the debt, he purchased two liens in January 2011 due to mature in 2016. Highlights of the investment:

• The debt was called away early in August 2011.
• The first lien paid a 7.75% coupon and the second lien paying a 13% coupon over the seven months.
• There was also a 4% return on the capital at the time of maturity.
• Where the issue was rated as B or junk at the time of purchase, Miramax is now rated as BBB.

Expectation for 2012
Following on from 2011, Mr. Shandro will continue to position the Fund to react quickly to changes in the current economic and interest rate environment. Maintaining a short portfolio duration and cash on-hand, he will aim to quickly adjust the portfolio to meet its objectives of preserving capital, keeping volatility low and generating returns.

For full standard performance data on the Pender Corporate Bond Fund, click here.

¹ Another Worthless Rating, Steven Lamb, Advisor.ca, January 16, 2012