Sun Life Wellington Opportunistic Fixed Income Private Pool

Fund commentary | Q4 2023

Opinions and commentary provided by sub-advisor Wellington Management Canada ULC

Market Review 

Global fixed income markets generated their strongest quarterly (Q4) return in more than three decades during Q4 2023, as measured by the Bloomberg Global Aggregate Bond Index - C$ Hedged. The asset class was bolstered by the belief that central banks have reached the end of their rate-hiking cycles. Most fixed income sectors produced positive excess returns over duration-equivalent government bonds as spreads compressed due to dovish policy rhetoric. The U.S. dollar weakened versus most currencies.


Performance Review 

During the quarter, the Sun Life Wellington Opportunistic Fixed Income Private Pool series F (the “Fund”) generated 6.8%. The blended benchmark for the Fund provided a three-month return of 5.7% over the same period. Over the past year, the portfolio returned 8.0%, outperforming its blended benchmark by 1.7%. 


Performance highlights

For Q4, strategic sector and tactical themes contributed to performance while market neutral detracted from returns. 

Strategic Sector 

  • The emerging market (EM) opportunities strategic sector was the largest contributor to return at (+223 basis points or bps). 
  • Similarly, after the U.S. Federal Reserve’s (Fed) pivot in early November, credit markets rallied significantly with high-yield spreads closing the year almost 136 bps tighter. This benefited credit-oriented themes within strategic sectors such as short cycle credit (+85bps), stranded credit (+39bps) and sustainable bond (+36bps). 
  • The activist governments theme generated strong returns of (+184bps) but inflation break-evens ended the year slightly weaker given the significant amount of disinflation. 
  • The core challenges theme contributed (+75bps) to return as global duration outperformed the U.S. It was also helped by a deceleration in inflation and growth in the wake of high policy rates and a slow down in housing markets.
  • The only strategic sector that detracted from performance was the term premia normalization theme (-21bps) as yield curves stayed at very flat levels and European rates fell due to slower growth. 


Market Neutral

  • Market neutral allocations detracted (-34bps) from the portfolio, with the largest detractions coming from the credit relative value allocations and opportunistic currencies: Global credit absolute return (GCAR), (-26bps) and foreign exchange (-11bps). 



  • Tactical positions added (+108 bps) to portfolio return. This mostly came from credit selection as well as opportunistic additions to agency mortgage-backed securities (MBS) after the Silicon Valley Bank crisis. Mortgage spreads reached levels not seen since the Great Financial Crisis (GFC).


Positioning and outlook

What worked in 2023 was that the Fed was able to continue quantitative tightening without impacting bank reserves. This could reverse in 2024. On the liquidity front, the reverse repo facility currently stands at around US$850 billion. At the current pace of tightening, the facility will likely reach its floor by the end of the Q2 2024. After that, additional quantitative tightening could reduce bank reserves and liquidity further. Both these impacts likely mean that U.S. growth will be materially slower in 2024. This could challenge U.S. credit, especially if foreign bond buyers such as Japan step away from buying U.S. credit on the basis of unattractive hedged yields. 


Within market-neutral allocation, the GCAR strategy is significantly short credit risk, mainly via EM investment grade as well as long-end U.S. investment grade credit, where spreads are below the fifth percentile over the long-term.


However, much of our sub-advisor Wellington Management Canada’s (Wellington) negative outlook on the slowing U.S outlook is based on the view that the Fed had overtightened policy rates relative to the sustainable real rate for the economy. Currently, the market is pricing in about 180 bps of cuts in 2024. If this is realized, that would go a long way in aligning policy rates with the neutral rate for the economy. The Fed could also end quantitative tightening early if the level of reserves in the system proves inadequate once the Reserve Repurchase Facility is drained and the banks run into trouble again. Both these actions would further elongate the cycle, but the likely effect would be a much weaker U.S. dollar, as the Wellington has already seen in Q4 2023. This is one of the reasons that Wellington has maintained an underweight U.S. dollar position to hedge against the risk that the Fed's actions further elongate the cycle. Also, it is the reason they are maintaining EM local rate positions, as a less onerous Fed would allow these central banks to cut much more than is currently priced into their respective curves.


There are a few ways Wellington is taking advantage of the potential for strong non-U.S. growth in the new year. First, Wellington added a new allocation to European financial credit within the stranded credit theme. This was a key theme and driver of returns for the portfolio from 2014 to April 2018, but Wellington closed out the allocation when valuation on subordinated European financials looked stretched. However, after the Credit Suisse failure in March 2023, there has been a persistent discount to European financial credit relative to the U.S. counterparts. This is despite European banking profitability benefiting substantially from higher policy rates and the healthiest balance sheets since the GFC. However, given the lack of investor focus the asset class has been abandoned, making it a perfect fit for the portfolio’s stranded credit theme. At the same time, if the European and Chinese cycles prove more resilient than expected, then both rate markets could move higher, and the portfolio is significantly short both rate markets. 


Wellington is also optimistic with the addition of a new market neutral strategy called absolute return mortgages (ARM). Given much higher interest rate volatility as well as supply and demand driven mispricing, there is much more dispersion and little correlation within the agency mortgage securities. Wellington is optimistic that the ARM strategy can take advantage of these mispricing and add alpha to the portfolio in the coming years.

Compound returns %1 Since inception2 5 Year 3 Year 1 Year Q3
Sun Life Wellington Opportunistic Fixed Income Private Pool - Series A


0.9 -3.1 7.1 6.6
Sun Life Wellington Opportunistic Fixed Income Private Pool - Series F 0.3 1.8 -2.2 8.0 6.8
Bloomberg Barclays Global Aggregate Bond Index (C$ Hedged)


1.0 -2.5 6.3 5.7

¹Returns for periods longer than one year are annualized. Data as of December 31, 2023. 

Inception date June 06, 2016.

Views expressed are those of, Wellington Management Canada ULC 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.

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.