'Explosive cocktail' helped real return bonds
What are we looking for?
Whether the party for Canadian real return bond funds is over.
Canada's annual inflation rate rose to more than 3 per cent during half a dozen months in calendar 2011. In three of the first six months of this year, however, the consumer price index has tumbled to below 2 per cent.
We ranked Canadian inflation-protected fixed-income funds by best performance for the year ended June. (We excluded duplicate versions.) These funds must be 90 per cent invested in inflation-linked securities.
What did we find?
Celebratory returns among most of the bond fund offerings.
BMO Real Return Bond exchange-traded fund (ZRR), which tracks inflation-linked Government of Canada bonds, led the pack with a 14.6-per-cent gain. IA Clarington Real Return Bond, a mutual fund which owns federal and provincial inflation-linked bonds, trailed slightly with a 14.2-per-cent return. Their strong performance contrasts with the double-digit loss by the Canadian stock market for the period.
Canadian real return bonds generally move in the same direction as regular (nominal) longer-duration bonds, which have rallied with the falling interest rates.These offerings are also affected by inflation expectations by investors.
The biggest portion of the one-year return took place in the second half of 2011, said Christian Pouliot, a portfolio manager with Industrial Alliance Investment Management Inc., and co-manager of the IA Clarington fund.
"We had a huge rally [in long term bonds], but we also had inflation in the economy," he said. "That is a very explosive cocktail for real return bonds." In the first half of this year, "the rally in bonds continued, but inflation slowed down a lot."
The manager doubts the party is over for real return bonds. "We can see lower bond yields in the future, but the biggest driver for the coming years should be inflation," he suggested. "Many central banks around the world are still easing their monetary conditions. We will reach a point where all the stimuli in the different world economies will gain traction, and bring inflation back to higher levels."
HOW CDN. INFLATION-PROTECTED FIXED-INCOME FUNDS FARED OVER YEAR TO JUNE 30
|Assets||to June 30||Calendar year returns|
|Fund||MER||(in $ mil.)||1 year||3 yrs.||5 yrs.||2011||2010||2009||2008|
|BMO Real Return Bond Index ETF||0.28||21.9||14.55%||17.84%|
|IA Clarington Real Return Bond||1.40||119.4||14.17%||11.59%||8.15%||17.78%||9.89%||12.97%||-2.60%|
|Pimco Canadian Real Return Bond||1.36||3.7||13.86%||n/a||n/a||n/a||n/a||n/a||n/a|
|PS Real Return Bond Index A||0.99||23.6||13.57%||n/a||n/a||16.38%||n/a||n/a||n/a|
|PH&N Inflation-Linked Bond||0.55||37.9||13.57%||12.29%||n/a||17.11%||10.73%||n/a||n/a|
|iShares DEX Real Return Bond Index||0.39||696.0||13.46%||12.18%||9.19%||17.88%||10.62%||14.10%||-0.03%|
|TD Real Return Bond||1.50||1,701.9||12.21%||10.64%||7.97%||15.30%||8.59%||13.52%||-1.20%|
|Mackenzie Sentinel Real Return Bond||1.62||317.3||12.20%||10.47%||7.83%||14.78%||8.39%||12.58%||-0.24%|
|Renaissance Real Return Bond||1.67||211.7||11.75%||9.42%||7.11%||13.86%||7.94%||10.34%||-0.05%|
|Investors Real Return Bond||1.96||338.2||11.11%||9.18%||6.61%||13.44%||7.96%||9.68%||-1.19%|
|Dynamic Real Return Bond||1.88||79.4||6.56%||7.21%||5.11%||10.55%||5.76%||9.81%||-3.17%|
|AGF Inflation Plus Bond||1.85||308.9||4.43%||3.75%||3.81%||5.13%||2.24%||6.44%||3.39%|
|S&P/TSX Total Return||-10.25%||6.69%||-0.74%||-8.71%||17.61%||35.06%||-33.00%|
|DEX Real Return Bond Total Return Index||14.93%||12.96%||9.82%||18.35%||11.09%||14.50%||0.42%|
|DEX Long Term Bond Total Return||18.82%||12.11%||9.53%||18.13%||12.52%||5.49%||2.66%|
|DEX Universe Bond Total Return Index||9.50%||7.00%||6.96%||9.67%||6.74%||5.41%||6.41%|