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Sun Life Core Advantage Credit Private Pool

Fund commentary | Q3 2020

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Opinions and commentary provided by SLC Management.

Market review

Public bond markets in the third quarter continued to look toward fiscal policy and central bank support to carry on the buoyancy that began in the second quarter.

The economy has also started to bounce back, although gross domestic product (GDP) has started to slow from prior readings and retail sales have continued to underperform. Canadians continue to be financially defensive given the unknowns they are facing. While central bank support of credit markets in North America was more in word than deed, the markets heeded the underlying sentiment that they would be supported, if needed. As a result, Canadian credit spreads tightened by 22 basis points, according to the Bloomberg Canadian Aggregate Corporate index. Front end corporate spreads significantly outperformed, while long corporate spreads were only slightly tighter on the quarter, causing the credit curve to steepen.

Canadian corporates outperformed both provincial and federal bonds in the third quarter across the short-, mid- and long-term. Outperformance was led by the securitization and real estate sectors, which were some of the more adversely effected sectors during the pandemic. The Telco and energy sectors lagged. Strong demand for corporate credit has kept new issuance volumes relatively strong versus 2019 new issuance. However, by September, corporate issuance in Canada had become more tempered, failing to keep pace with the record September issuance of 2019. New issue concessions in the primary market continued their decline after peaking in March. By September, most concessions had evaporated completely and even turned negative, but new issuance continued to be favoured over adding new corporate bonds through secondary trading.

Portfolio review

The portfolio's excess returns in the third quarter were primarily driven by credit positioning. The Fund’s overweight position in corporate bonds was a positive contributor to returns as corporate spreads outperformed Canada bonds and provincial spreads.

While overall U.S. dollar corporate spreads tightening underperformed the corporate bond spreads tightening in Canada, long U.S. corporate spreads outperformed long corporate spreads in Canada. This long part of the curve is where the Fund has most of its active U.S. dollar corporate positions. In addition to the U.S. long corporate outperforming, the cross-currency swaps used to hedge the Fund’s U.S. dollar bonds also contributed to its outperformance.

Portfolio positioning

The duration and credit quality was kept relatively close to the benchmark.

Composition

The portfolio was relatively diversified across the federal, provincial, and corporate sectors. The Fund’s federal and provincial bonds exposures were underweight relative to the benchmark, and corporate bonds were overweight. The largest corporate sector overweight was to industrial, where the portfolio manager is using the U.S. dollar corporate market to access high-quality issuers like Microsoft and Apple. The portfolio was overweight inflation-linked bonds by approximately 7% relative to its benchmark.

Term Structure

The portfolio is overweight the 10 and 30-year term of the yield curve relative to its benchmark.

Credit Quality

The portfolio’s overall credit quality was in line with that of its benchmark. The overweight in “A” credit is driven primarily by an overweight to corporate bonds, such as utilities.

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Series A Series F

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Views expressed are those of Sun Life Capital Management (Canada) Inc., sub-advisor to Sun Life Core Advantage Credit Private Pool for which SLGI Asset Management Inc. acts as portfolio manager. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.  The indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or other optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

While Series A and Series F securities have the same reference portfolio, any difference in performance between these series is due primarily to differences in management fees and operating fees. The management fee for Series A securities also includes the trailing commission, while Series F securities does not. Series A securities of the fund are available for purchase to all investors, while Series F securities are only available to investors in an eligible fee-based or wrap program with their registered dealer. Investors in Series F securities may pay a separate fee-based account fee that is negotiated with and payable to their registered dealer.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

© SLGI Asset Management Inc. and its licensors, 2020. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.