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 | Q2 2022

Opinions and commentary provided by SLC Management.

Market Review

The convergence of higher Government of Canada yields and wider corporate credit spreads played havoc with bond returns in the second quarter of 2022. Government of Canada yields moved progressively higher as the quarter wore on before finally finding a footing and reversing to take yields off their highs before the quarter ended. The short end of the yield curve came under pressure as the Bank of Canada finally commenced raising rates as inflation continued its march higher to 7.7% year over year in May and unemployment hovered at record lows. Canadian government yields underperformed U.S. yields across the curve outside of the relatively new 20-year U.S. treasuries that had a particularly challenging quarter.

It was a risk off quarter globally and Canadian corporate credit spreads were not immune to this global contagion. Market volatility became elevated as investors tried to reason between the divergent outcomes of higher future inflation and the potential for a recession. While the spreads were wider for the Fund, the characteristically less volatile Canadian credit spreads did manage to outperform the more volatile corporate credit spreads in the U.S. and Europe which have now given back their 2021 outperformance. The yield on the FTSE All Universe All Corporate index ended the quarter at 4.83% and has not been this high since 2009. Performance of Canadian credit sectors was quite varied in the quarter with energy and utilities outperforming while insurance, bank subordinated debt and REITS underperformed. While performance did not vary that much by rating, the performance by term differed significantly. The 10/30 credit curve flattened by 16 basis points so far this year as there was significant bank new issuance and asset managers selling to raise cash for redemptions in the shorter terms while there continued to be a dearth of issuance of long corporates.

Performance: 

Fund Name 1 Month 3 Month 6 Month 9 Month 1 Years 2 Years Since Inception Inception Date
Sun Life Core Adv Credit Private Pool - Sr F  (1.86) (5.38) (12.10) (10.84) (10.03) (5.98) (4.08) 25/02/2020
FTSE Canada Universe Bond Index (2.18) (5.66) (12.23) (10.94) (11.39) (7.02) (4.62)  

*Source: SLGI 

Fund Review: 

The Fund’s slightly short duration positioning and curve positioning added value in the second quarter. The holding in the Short Term Private Fixed Income Plus fund also added value in the quarter outperforming its short corporate benchmark. The underweight in Federals and provincials, the worst performer this quarter, and overweight in corporates also contributed to active returns. While U.S. corporate credit spreads underperformed Canadian corporates in the quarter, the performance of the hedges offset the underperformance of U.S. credit.

Portfolio Characteristics: 

The yield on the Fund rose significantly over the quarter as Canada yields continued their climb higher. The excess yield versus the benchmark also rose as the Fund added to the corporate weight. Active duration was unchanged from the previous quarter and is slightly shorter than the benchmark. Credit quality continues to be in line with the benchmark.

  Yeild (%) Effective Duration (years) Average Credit Rating
Sun Life Core Advantage Credit Private Pool 4.58 7.34 A
FTSE Canada Universe Bond Index 3.91 7.43 AA
Difference 0.67 (0.09) -
Estimated Yield Including FX* 4.62 - -

*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: 

  • Term Structure: The Fund continues to favour the value found in the 20 – year part of the credit curve. During the quarter, the 5-year exposure for the Fund increased above the benchmark as the yield curve remains flat and the portfolio managers took part in the shorter dated financial issuance.
  • Credit Quality: The Fund increased the exposure to “A” and “BBB” rated bonds rose, while “AAA” was reduced, as the portfolio manager sold Federal bonds and high quality U.S. dollar corporate bonds in favor of Canadian dollar corporate bonds.
  • Currency Mix: The foreign weighting decreased from 17.8% at the end of the first quarter to 15.8% as the portfolio manager sold U.S. dollar corporates as they outperformed in the middle of the quarter. The portfolio hedges its U.S. dollar bonds using a cashflow swap to minimize the fund’s exposure to changes in U.S. currency and U.S. interest rates.

Significant Transactions: 

The Fund’s Federal weighting was reduced by the portfolio manager, in favor of adding to its Financials and Infrastructure exposure. Within the Finance sector, the portfolio manager participated in new issues from Canadian banks, TC Pipelines and Manulife. In U.S. dollar corporates, the Fund was net sellers of corporate bonds including Microsoft, Amazon and Verizon in favour of adding Canadian dollar corporates like GTAA and Transurban.

Outlook:

With inflation running hot and yet to peak, developed market central banks are quickly upsizing rate hikes. The award so far for the biggest surprise, goes to the Bank of Canada. At its last meeting it shocked markets with a 100 basis point rate hike. Its overnight rate now sits around 2.5% and markets expect another 100 basis points of rate increases by the end of the year. The Fed has also upped its game. Having increased rates by 75 basis points at its last meeting, its expected to do the same at its next meeting towards the end of July. Central bank urgency is understandable. If inflation becomes persistently high business and consumers can quickly shift their inflation expectations and central banks lose the credibility to use inflation targeting as a tool. Central banks will remain dogged in aggressively arresting inflation even if it leads to a growth setback. The alternative of allowing stagflation to emerge, the toxic mix of high inflation and low growth, is more corrosive to long term prospects.

The Canadian unemployment rate recently hit a record low. Which caps off a remarkable recovery from the spring of 2020 when unemployment spiked at 13%. Another notable achievement is the quality of the jobs created. Research from economist Benjamin Tal of CIBC, finds that the number of jobs paying more than $30 an hour has jumped by 8% from pre-pandemic levels, while those earning less than $30 has dropped 3%. Suggesting workers have come back to better paying jobs. One of the few negatives in the Canadian employment outlook is a dip in the labor participation rate. Some of this seems related to a large swathe of workers, 55 and older, who have left the workforce. However, improving wages may help restore participation.

In the U.S., labor dynamicsare also vibrant as the number of jobs available per unemployed worker is roughly twoto one. But rising rates will in variably slow activity. Some of that is starting to show withjob openings getting scaled back and modest layoffs being reported. Jobless claims havealso marginally risen from near historical lows.

As central banks tighten, recession fears keep mounting. History suggests these episodes don’t end well. On average a recession ensues two years after the start of a tightening cycle and the current tightening is more aggressive than most as it grapples with sticky inflation. What typically exacerbates a downturn is aggressive layoffs as companies turn cautious in the hope they can quickly rehire when conditions improve. But this current labor market, with fierce competition for talent, may encourage companies to hold on to their workforce and look to ride out any set back and be better position to participate in the recovery.

Household and business balance sheets areentering this tightening cycle in solid shape. But until central banks have finished hikingrates, investors will keep worrying about the timing and severity of any growth interruption.

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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