Effective November 27, 2021, the deferred sales charge and low load sales charge purchase options will no longer be available for purchase on Sun Life Global Investments mutual funds. Switches between funds of the same sales charge purchase option will be permitted.

Sun Life Core Advantage Credit Private Pool

Fund commentary | Q1 2022

Opinions and commentary provided by SLC Management.

Market Review

In the first quarter of 2022, the portfolio manager saw a new source of volatility across most major bond and equity markets. The outbreak of war in the Ukraine, and the accompanying Russian sanctions, combined to put new pressure on energy and grain prices. This did not help markets already fretting about the magnitude of inflationary effects from both fiscal and monetary global stimulus that was saw throughout the COVID-19 pandemic. The Bank of Canada’s first quarter 2022 survey showed that the number of firms reporting capacity pressures from labour or supply chain challenges was at a record high. The Bank of Canada and the U.S. Federal Reserve both commenced raising rates to control inflation in the first quarter, with the short-term portion of the yield curve bearing the brunt of the impact. The yield curve flattened significantly in the quarter. Two-year rates rose 127 basis points in anticipation of central bank rate hikes continuing over the course of the year while 30-year rates were only 70 basis points higher. This brought two-year bond yields within 10 basis points of 30-year bond yields, a level not seen since early 2020. 

Corporate credit fundamentals continue to improve on the back of strong economic growth, but corporate credit spreads have been challenged in 2022 by inconsistent investor inflows and new issue supply. The first quarter started with solid corporate bond new issuance in January while riding a lull in February. March, however, brought record corporate bond supply of $30 billion, including over $20 billion in Canadian bank issuance. While new issuance overall is well ahead of 2021 year-to-date, non-bank corporate issuance is occurring on a slower pace compared to 2021. New issue concessions rose during the middle of the quarter as financial market volatility increased as war in the Ukraine commenced, but the concessions faded as the quarter closed and investor inflows turned more supportive. Interest rate sensitive sectors such as Real Estate were among the poorest performing corporate bonds in the quarter with credit spreads 35 basis points wider in the quarter driven by the substantial rise in interest rates. Credit spreads on Financials moved 28 basis points wider as they were challenged by unrelenting new issue supply in this sector. Corporate bond sectors with a significant long duration exposure like Infrastructure and Communications have outperformed mostly due to the dearth of long corporate issuance so far in 2022, ending only 18 basis points wider. 

Fund Review

Volatility was once again a theme in 2022. With inflationary pressures admittedly persistent, central banks began tightening in the first quarter. The yield curve rose significantly and flattened as short rates rose in anticipation of even larger rate hikes in 2022. The Fund’s slightly short duration positioning and curve positioning added value, while the U.S. bond exposure and associated hedging swaps detracted from active returns in the quarter. 

  Yield (%) Effective Duration (years) Average Credit Rating
Sun Life Core Advantage Credit Private Pool 3.30 7.79 AA
FTSE Canada Universe Bond Index 3.01 7.88 AA
Difference 0.29 (0.09) -
Estimated Yield Including FX* 3.35 - -

*Represents the estimated total yield earned, after adjusting for the impact of hedging activities. Note that the overall Fund yield does not take into account the benefit from hedging strategies.

Portfolio Positioning: 

The yield on the Fund rose significantly over the quarter as Canada rates climbed higher, and excess yield versus the benchmark rose slightly. Duration remained shorter than the benchmark, as inflation remains a concern. Credit quality continues to be in line with the benchmark. 

  • Term Structure: The Fund continues to be positioned in favour of the value found in the 20-year part of the yield curve relative to the more common 10-year and 30-year points of the curve. This quarter saw the portfolio manager moving some of the exposure from the 30-year part of the curve to invest more funds in 20-year debt to take advantage of the inversion in the long end of the curve. The five-year exposure is now more in line with the benchmark, as the portfolio manager saw better value there due to the flat Canada curve and attractive short corporate new issuance. 
  • Credit Quality: The credit quality of the overall Fund did not significantly change during the quarter. The exposure in “AA” and “A” rated bonds rose, while  “AAA” was reduced, as the portfolio manager sold Federal bonds in favor of provincial and corporate bonds. (Sun Life Core Advantage Credit Private Pool’s exposure to non-investment grade asset is at 0.8%. This exposure is driven by the portfolio’s allocation to the SLC Management Short Term Private Fixed Income Plus Fund. ) 
  • Currency Mix: The foreign weighting continued to increase from 15.3% at the end of the fourth quarter to 17.8%. Wider U.S. credit spreads and new issue opportunities that provide diversification made U.S. debt appealing. The portfolio hedges its U.S. dollar bonds using a cash flow swap to minimize the fund’s exposure to changes in U.S. currency and U.S. interest rates. (Foreign: 17.1% USD, 0.5% GBP and 0.2% EUR.)

Significant Transactions

The Fund’s Federal weighting was reduced, in favor of adding to its provincial and financial exposure. Within the Finance sector, the portfolio manager bought Canadian, U.S. and European bank debt. The portfolio manager also added a new issue from U.S. pharmaceutical maker Amgen. As Provincial credit spreads widened, the portfolio manager took the opportunity to reduce the underweight in that sector. 

Outlook

Canada’s unemployment rate is close to a 45-year low. While COVID-19 cases are still edging up, more and more people are finding ways to live with and navigate the virus. As in the U.S., higher food and energy prices are weighing on household disposable income. On the back of gross domestic product (GDP) gains in the first quarter, the economy is above its pre-pandemic levels. The portfolio manager expects inflation to peak in the second quarter. With home prices up 20%, the government is looking to cool the housing market. For the next two years, it is banning foreign buying of residential real estate. It is also imposing higher taxes on speculators, that is, those who sell a property within one year of ownership. To support first time homeowners, the government is also doubling the buying tax credit and introducing a tax-free first home savings account. Across North America, growth is expected to hold up as both Canada and the U.S. are more energy independent than other major economies.  The labor market remains vibrant, and household and business balance sheets are in good shape. 

Global inflation was already running at elevated levels before the war, but the threat of shocks to energy and food supplies adds more inflation pressure. Russia’s share of global GDP is modest, but as a major energy and metals producer, its impact on global commodity prices is significant. Sanctions against Russian oil producers and refiners are driving oil and natural gas prices up as the risk of supply dislocations increases. Russia and Ukraine are also large exporters of wheat and other grains. With global inventories well below average, the risk of supply interruptions of these food staples is filtering through to higher grocery bills.

Despite the uncertainty, the persistent pace of inflation is pushing central banks to be aggressive. The Fed is expected to enact an additional 200 basis points of rate hikes this year and start reducing its massive asset portfolio in the next few months. In normal tightening cycles, the Fed would increase rates in 25 basis point increments. Now it is expected to start with a series of 50 basis point hikes to underscore its commitment to corralling inflation. The Bank of Canada (BOC) has already increased rates by 50 basis points at its April meeting and its hawkish tone suggested more 50 basis point rate hikes could follow in the next few meetings. The BOC also affirmed its upbeat view on the economy. As with the Fed, the BOC appears in a rush to hike rates and normalize in the 2.5-3% range. And all of that is expected within a year, unless inflation dramatically retraces, or financial conditions significantly tighten. The rate outlook is already having a material impact on mortgages rates and could start to quickly cool housing activity. 

Sun Life Core Advantage Credit Private Pool Monthly snapshot:

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.

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