The Pender Corporate Bond Fund is a fixed income fund that is conservatively managed to preserve capital, as well as being opportunistic to generate returns.
Feb. 28 2022
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The Fund is focused on coverage, seniority and duration and has three key traits:
Being nimble and opportunistic the fund can use its size to invest in opportunities large or index based funds cannot.
Sign up for access to watch a recent webinar, hosted by the Quebec team, featuring PM Geoff Castle talking about credit market dynamics, how the Pender Corporate Bond Fund is positioned to navigate challenges and where the team are finding opportunities, given today’s environment.
The Pender Corporate Bond Fund capitalized in 2021 on decisions made in the depths of the panic in the spring of 2020. One of our most beneficial moves was in picking up a series of deeply distressed securities, many of which were priced below 50 cents on the dollar in mid-2020 and riding those to much higher levels. Examples here include our purchase of a Chesapeake Energy Corporation (NASDAQ: CHK) term loan at less than 40 cents on the dollar, walking the position through a Chapter 11 filing and disposing of our position at prices as high as $1.20.
Another category of strength for us was rate-reset preferred shares, which not only benefitted from falling credit spreads, but also from a higher outlook for interest rates that increased the anticipated dividends. People don’t often think of BCE Inc. (TSE: BCE) as an issuer that can deliver double-digit returns on preferred shares, but the total return on a line like Bell Canada Preferred Q was over 35% in 2021. We had the good fortune to buy these when the movement towards higher rates was viewed as unlikely. Now, it is consensus.
Something else that helped us, particularly in the Pender Bond Universe Fund, was keeping our durations tight. We didn’t know the 10-year Canada bond was going to move from a 0.7% yield to 1.4%, but anyone could calculate that if it happened, the capital loss would be about 7%—a big potential loss in comparison to a 0.7% yield to maturity! So, we maintained much shorter duration than passive index followers and it paid off for us.
The biggest difference is just the stance of the Fed. We began 2021 with the assurance that, through their actions, the Fed had our backs. They were buying bonds like there was no tomorrow and very few people were talking about rate hikes. Now, there is a general expectation that central banks will still keep a ceiling on rates, but no one knows exactly where. In the meantime, the dot plot is telling you that rate hikes are coming.
Yield-wise, things are about the same. Spreads tightened last year, but this compression was balanced out by rising government bond yields. For instance, the ICE BoA US High Yield Index effective yield, which started 2021 at 4.3%, remains within 0.1% of that level at year end.
Investment-grade yields are a little higher this year compared to 12 months ago. For instance, the BBB index yield is about 2.6% compared to 2.1% last December2. That being said, IG yields are still below the measured recent rate of inflation.
Another feature of the current environment is a very low level of corporate distress after a spike in defaults in 2020-21, as COVID drove numerous corporate entities into bankruptcy. However, the recovery in the past 12 months has substantially cleaned up the inventory of fresh defaults and CreditSights is forecasting default rates well below average for 2022. That doesn’t mean we need to drop our guard against future distress, but an anticipated absence of defaults suggests there will be a little less work-out activity in 2022.
There is going to be a lot of similarity in our approach between any two years. In many ways, being a Portfolio Manager is a bit like being Bill Murray’s character in “Groundhog Day,” in that we are continually waking up to the same task of scouring the market for unpopular credits which offer a higher-than-average yield with a low or manageable risk of default. This approach causes us to move between sectors as we tend to “follow the misery”. We have therefore been phasing out our positions in the oil and gas sector, as spreads have tightened up, while expanding weight elsewhere, particularly in the convertible market, where some equity prices have been crushed and yields have soared. Examples of the latter include a position in the convertible bonds of internet marketer Groupon, Inc. (NASDAQ: GRPN), issued at par early in 2021 but which traded as low as 75 cents in September 2021.
One way that we are approaching 2022 a bit differently to prior years is to more assertively use our scale to create return opportunities for the Fund. In 2021, we worked with three issuers with whom we had larger positions to exchange discounted bond positions for more valuable securities. These were win/win transactions: the issuers were able to reduce debt and/or extend maturities and we were able to increase the value to the Fund—and therefore clients—from the deal. We will look for more opportunities like these in 2022.
Another focus for this year will be adding weight into conventionally desirable cap structures. Over the last couple of years, we found that anticipating that cash flows for a certain company might improve with a cyclical rebound has proven beneficial. Finding ourselves at the midpoint in the cycle means there is an argument to be made that many industries are now operating near their full potential. So traditional tests like interest coverage and debt/EBITDA are assuming more importance for us and we are less interested in blue-sky potential.
There is no longer an “easy button” in fixed income. In order to earn attractive fixed income returns…
Portfolio Manager Geoff Castle discusses credit market dynamics and portfolio holdings on a monthly basis.
|Class||Fund Codes||Description||MER||Minimum Investment: Initial/[Subsequent]|
|A||PGF 500||Front End||1.90%||$5,000/[$100]|
|F||PGF 510||Fee Based||1.10%||$5,000/[$100]|
|A (US$)||PGF 501||Front End||1.90%||US$5,000/[US$100]|
|F (US$)||PGF 511||Fee Based||1.10%||US$5,000/[US$100]|
|I||PGF 550||Fee Based – HNW||0.95%||$100,000/[$100]|