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Sun Life Opportunistic Fixed Income Private Pool

Fund commentary | Q3 2020

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Opinions and commentary provided by Wellington Management.

Portfolio review

Reflation was a dominant theme for fixed income markets in the third quarter of 2020. The U.S. Fed extended its emergency liquidity provisions through the end of the year. It also unveiled a new policy framework that will effectively require inflation to be above 2% and an extremely low unemployment rate before they will consider raising interest rates. These actions, along with investor optimism from economic reopening and potential COVID-19 treatments, resulted in the U.S. dollar continuing its decline from its March peak. The Bloomberg Dollar index fell approximately 3.5%, high yield bond spreads rallied 1.6% and the 10-year breakeven rate rose 0.3%.

The Fund is generally positioned for this reflationary outlook.  During the quarter, the Fund realized positive contributions from each major component of the portfolio including strategic sector (+1.5%), market neutral (+0.8%) and tactical (+0.8%) outperforming the Barclays Global Aggregate hedged to Canadian dollar.

Within the strategic sector allocations, the strongest contributor was associated with the Activist Government theme, including global-inflation-linked bonds, U.S. agency MBS, investment-grade corporate bonds and municipal bonds. The Fund’s Activist Government theme is based on the view that: unprecedented levels of monetary and fiscal stimulus could manifest in higher inflation expectations and lower real yields, and; that Fed intervention within investment-grade credit markets will continue to be a tailwind to higher-quality fixed income sectors.

The second largest contributor within the strategic sector allocations included both investment-grade and high yield corporate positions associated with the Credit Dislocation theme. These strategies performed well, capturing the tailwind of a 100 basis point tightening in high yield spreads, and benefitted from the selection of issuers and sectors that gained the most in the current environment.

The Fund also realized positive contributions from strategic sector positions in structured credit and emerging markets local and external debt. Holdings in residential mortgage-backed securities contributed to performance, as the U.S. housing sector has been resilient benefitting from increased demand for suburban housing fueled by COVID-19.

The sector rotation strategies within the tactical bucket were strong contributors to returns, generating 1%. While credit spreads have compressed, there is still substantial dispersion within and across credit sectors that portfolio managers have been able to take advantage of. Absolute Return Bond and Currency strategy was also a strong contributor and benefited from its short U.S. dollar exposure.

Portfolio positioning

Yields are low and many investors are likley reassessing the role of fixed income in their portfolios. At the end of September, the yield on the Barclays Aggregate was 1.18% and the yield on high yield was 5.77%. With yields this low, there is a question of whether investment grade fixed income will provide the negative correlation to equities in the next downturn. At the same time, yields on non-investment grade sectors are not providing the same level of income they historically have, with likely higher volatility. The goal of the Fund is to generate 5-6% total return with volatility in-line with investment grade fixed income. This has become more difficult in the current environment than at the end of March when yields were substantially higher. Nevertheless, the portfolio manager is optimistic about the future and believes, in many ways, there are opportunities in the current fixed income environment.

First, while yields are currently low, there are several catalysts on the horizon that may change that. The U.S. election, continued global monetary and fiscal coordination, further economic reopening and possible COVID-19 treatments all have the potential to benefit reflationary assets, which, despite their rally since March, remain cheap over a longer-term perspective.

Second, while this may be a low yield environment, the portfolio manager does not believe it will be a low-volatility environment. While it may seem tempting to go down in credit quality to generate higher returns, the portfolio manager believes the uneven opening of global economies could mean a still-elevated default environment and increased volatility. Within the Fund is the ability to allocate to absolute return allocations that may take advantage of the dispersed reopenings and any resulting volatility. This has already been observed within the credit space, but the portfolio manager believes this volatility and dispersion will make its way to currency markets, as they are typically the one outlet for relative economic performance when policy rates are at zero. For this reason, the portfolio manager increased  the allocation to currency absolute return strategies in Q3. The opportunity for highly dynamic currency-relative value strategies has improved, as cross-correlation among currencies included in the Bloomberg Barclays U.S. Dollar index (DXY) has declined.

Finally, the Fund enjoys a benchmark-agnostic approach to investing in fixed income markets. The portfolio manager resists having a bias toward a particular country or region simply because it’s home base for many fixed income investors. While yields in the U.S. and similar markets are low, that is not necessarily the case for all global markets. For example, the yield on Chinese 30-year government bonds was 3.87% at the end of the quarter, which is high for a country with core inflation (CPI) of only 0.5%. Within the Core Challenges theme, the portfolio manager is searching the globe, adding to duration markets they believe offer attractive yield and could  protect the portfolio in the next equity downturn while offering attractive currency-hedged yields. 

Fund performance

Compound returns %1 Since inception2 3 Year 1 Year Q3
Sun Life Opportunistic Fixed Income Private Pool - Series A

0.4

1.1

5.9

2.8

Sun Life Opportunistic Fixed Income Private Pool - Series F

1.4

2.1

6.9

3.1

Bloomberg Barclays Global Aggregate Bond Index (C$ Hedged)

3.6

6.4

7.2

0.7

¹Returns for periods longer than one year are annualized. Data as of September 30, 2020.

²Partial calendar year. Returns are for the period from the fund’s inception date of June 6, 2016 to December 31, 2016.

Learn more about Sun Life Private Investment Pools

On May 24, 2019 Sun Life Opportunistic Fixed Income Fund, previously Sun Life Multi-Strategy Return Fund, changed its name and underwent a change in investment objective to seek exposure to diverse global fixed income strategies; it is structured as an alternative mutual fund. The sub-advisor assumed portfolio management responsibilities at that time. On February 26, 2020 Sun Life Opportunistic Fixed Income Fund was renamed to Sun Life Opportunistic Fixed Income Private Pool.

Views expressed are those of Wellington Management Canada, sub-advisor to select Sun Life mutual funds 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.