Fixed Income isn’t working like it used to

Get Active in your Fixed Income Portfolio

Why Go Active?

For many Canadians, the “simple” days of fixed income investing appear to be over. For years, passive fixed-income investing through indexed products could offer steady returns at low risk. But interest rates are increasing, central banks are normalizing their monetary policies and inflation has returned. Also, investors face the prospect of a slower global economy, persistent trade tensions and lower bond yields in developed markets.

Today, fixed income investors face more complexity. While they want their fixed income investments to generate yield and returns, they also want to manage risk in an increasingly uncertain environment. Here are three reasons why Canadians need to take an active approach to fixed income investing.

Three Key Reasons

Expand All | Collapse All

  • Actively managing risks to a portfolio is crucial for investor outcomes, especially for limiting losses. Market losses can make a big difference in an investor’s long-term returns, depending on market volatility. When combined with consistent withdrawals (i.e. retirement income payments), market losses can be significantly harder to overcome, especially in the short term. That’s why effective risk management requires a truly active approach, with a manager who understands an investment’s potential downside as well as its upside.

    Active risk management can aim to limit downside risk in a portfolio, which may lead to better outcomes for investors. For example, actively managed high yield funds, on average, had a downside capture ratio of just 58% over the 10 years ending Dec. 31, 20181. The ratio means that, during periods of market weakness, the average high yield fund lost much less than the benchmark index.

    Losses have a greater impact than gains

    After a loss, it takes a greater gain to return to your original value.

    Imagine you invested $100,000 and your account declined 20%

    If you gained 20% back, you would be $4,000 short of your initial investment

    To fully recover from the 20% loss, you would need to gain 25%

  • In fixed income indexes, companies and governments with the largest amounts of debt become larger components of the index. “Buying the index” can expose you to companies and governments that are increasing their financial leverage, and that could create concentration risk that you may not be aware of.

    But good active fixed income managers research every investment, with the goal of mitigating holdings that do not make sense for the risk/reward profile the portfolio is seeking to achieve. For example, if you passively tracked your investments to the Canadian fixed-income market your portfolio would be heavily concentrated in just two sectors: government and financials. Those sectors represented about 84% of the FTSE Canada Universe Bond Index, as of Dec. 31, 2018.  And looking globally, a passive index tracker to the Bloomberg Barclays Global Aggregate Bond Index would have heavy weightings to the U.S. and Japan, which currently make up 39% and more than 16% of the index as of Dec. 31, 2018, respectively. If one or more such large markets weaken, it can dampen overall index returns. Active managers can look beyond benchmark weightings to research securities one by one and weigh risks against the potential for returns. Actively managed fixed-income investments can be used to access individual countries and regions to capture growth through precisely targeted  exposures.

    FTSE Canada Universe Bond Index

    Government

    Financials

    Other

    Bloomberg Barclays Global Aggregate Index

    United States

    EMU Europe

    Japan

    Other

  • Passive fixed-income indexes cannot make decisions and they do not assess risks from market developments and shocks. But active managers can be proactive to help investors protect their fixed-income returns. Unlike passive fixed-income products, actively managed funds can help investors avoid risks from market downturns. Active managers constantly assess risks and can reposition portfolios when opportunities arise or as shocks occur. They can adjust portfolios immediately after a market change, or even in anticipation of a major market event.

    A recent example of this agility was the positioning of certain Franklin Templeton portfolios in anticipation of interest rate increases in Canada. For example, in 2017, when the Bank of Canada was expected to hike rates while the mid- to long-term prospects for Canada’s economy were less promising, Franklin Bissett managers re-positioned some of its fixed-income fund portfolios. The managers took large underweight positions in short-term bonds, the part of the market that’s most impacted by central bank rate policies. This was offset by taking an overweight position to assets in the intermediate part of the yield curve and a more neutral to slight overweight to the long-end. This active positioning helped fund performance in 2017 and 2018 when the yield curve flattened and mid/long-term bonds outperformed shorter term bonds.

    Actively Positioning Portfolios in Anticipation of Market Shocks

    FTSE Canada Universe Bond Index2

    Franklin Bissett Core Plus Bond Fund

OUR ACTIVE FIXED INCOME SOLUTIONS

Add stability and income with high quality corporate bonds

With uncertainty in the markets, professional managers can actively navigate the corporate bond market to identify high quality bonds which offer investors:

  • Stability through steady income
  • Attractive yield opportunities
  • Portfolio diversification through low correlation to other fixed income asset classes

We offer two corporate bond ETFs:

FLCI – Franklin Liberty Canadian Investment Grade Corporate ETF: Seeks to provide investors with long-term capital growth and steady income by investing primarily in high-quality Canadian investment grade corporate bonds.

FLUI – Franklin Liberty U.S. Investment Grade Corporate ETF: Seeks to provide investors with capital preservation and income by investing primarily in high-quality U.S. investment grade corporate bonds with a Canadian-dollar currency hedge to smooth out any fluctuations in currency exchange rates.

We also offer a core bond fund with a generous allocation to corporate bonds, if you prefer a one-stop fixed income solution.

Franklin Bissett Core Plus Bond Fund: seeks a high current income and some long-term capital appreciation by investing primarily in Canadian federal and provincial government and corporate bonds, debentures and short-term notes. The fund maintains an overweight in high-quality corporate and provincial issues, relative to Canadian federal bonds. The fund may also invest in foreign securities.

Manage interest rate risk with floating rate bank loans

With interest rates potentially on the rise, bank loans have interest payments that reset periodically in tandem with changes in the market rate. As a result, an actively managed portfolio of bank loans can offer investors:

  • Attractive yield opportunities, especially during periods of rising interest rates
  • Portfolio diversification through low correlation to other fixed income asset classes

We offer the following bank loan solution:

FLSL – Franklin Liberty Senior Loan ETF: Seeks to provide a high level of current income and preservation of capital by investing primarily in senior, secured, income-producing floating rate corporate loans made to, and corporate debt securities issued by, U.S. and non-U.S. entities.

Expand and diversify your income opportunity set with global bonds

It’s hard to keep track of which markets around the world are poised to perform, especially because winners rotate. What’s more, many Canadian investors demonstrate a “home country bias” and miss out on opportunities found outside of local borders. Global bonds can offer investors:

  • Access to a broad range of bond markets and sectors around the world
  • Opportunity to participate in different currency markets
  • Yield opportunities beyond Canada

Our global bond solutions include:

FLGA – Franklin Liberty Global Aggregate Bond ETF: Seeks to maximize total investment return, consisting of a combination of interest income and capital appreciation by investing primarily in investment grade fixed or floating-rate debt securities issued by governments, government related entities (including supranational organizations supported by several national governments) and corporations worldwide.

Templeton Global Bond Fund: Seeks high current income with capital appreciation by investing primarily in fixed-income securities issued around the world. The fund may not invest more than 25% of the total value of the invested assets (excluding cash) in a particular industry.

Insights & Resources

Active Fixed Income Management for All Markets

Features our diverse selection of actively managed bond funds suitable for all market conditions.

Download

Franklin Liberty Canadian Investment Grade Corporate ETF

Highlights key reasons why investors should consider this ETF.

Download

Templeton Global Bond Fund

Considers interest rates, sovereign credit and currency ideas in a global search for bond opportunities.

Download

Franklin Bissett Core Plus Bond Fund

Seeking out the best yield opportunities while linking volatility.

Download