Portfolio returns: Q4 2024
| Total Return | 1M | 3M | YTD | 1YR | 3YR | 5YR | 10YR | Since Inc. July 12, 2013 |
IG Core Portfolio – Income F |
0.32
|
1.01
|
5.89
|
5.89
|
2.33
|
2.45
|
2.57
|
2.71
|
Quartile rankings |
3 |
1 |
2 |
2 |
2 |
2 |
1 |
IG Core Portfolio – Income Series F
Portfolio commentary
Q4 2024
Highlights
① The portfolio gained over the quarter as shorter-term yields were largely unchanged while longer end yields in Canada were dragged somewhat higher by U.S. yields.
② Exposures to short-term bonds contributed most to portfolio performance.
③ Despite market volatility that persisted in the period, corporate spreads continued their slow grind narrower, closing into the tightest level since the credit crisis.
Portfolio overview
Unsurprisingly, U.S. political events were the primary focus for fixed income markets during the fourth quarter of 2024. Despite a surge in excitement in favour of Kamala Harris after President Biden stood aside earlier in the year, polling, and particularly betting markets, moved more in favour of a Trump/Republican win as the year rolled on, correctly predicting the outcome of the early November election. Markets moved in lockstep, aiming to decipher what a Trump win and possible Republican sweep would mean. Against this backdrop, the two policies markets are most focused on and concerned about are deficit spending and tariffs.
The concerns over unfunded tax cuts drove yields higher led by the back end of the curve – steepening the curve marginally in the process. 5-year, 10-year and 30-year U.S. Treasury yields rose 87.2 bps, 83.8 bps and 71 bps respectively, whereas 2-year U.S. Treasury yields rose 62.8 bps. Tariff concerns were most evident in currency markets with the U.S. dollar performing well, particularly against currencies most at risk of the most substantial tariffs – Mexico and Canada.
Both the FTSE Canada Universe Bond Index and the U.S. Investment Grade Bond Index posted negative returns during the quarter.
Within fixed income, the IG Mackenzie Mortgage and Short Term Income Fund was the largest weighted allocation in the portfolio and the largest contributor to performance. Security selection in corporate bonds and allocation to mortgages contributed to performance.
The Mackenzie – IG Canadian Corporate Bond Pool was the third-largest weighted allocation in the portfolio and a positive contributor to performance. The fund’s overweight allocation to corporate bonds contributed to performance.
The Mackenzie – IG Canadian Bond Pool was the second-largest weighted allocation in the portfolio and the weakest contributor to performance. The fund’s muted total return performance was impacted by hedged foreign currency exposure.
During the period, the fund’s exposure to the Mackenzie – IG Canadian Bond Pool was reduced from 20.1% to 0.0%. The fund’s allocation to the IG Mackenzie Canadian Money Market Fund increased from 5.0% to 18.1%. The fund’s allocation to the Investors Real Property Fund remained consistent at 8.6%. The fund ended the period with a 3.0% allocation to the Mackenzie High Quality Floating Rate Fund.
Market overview: the U.S. dollar and equities dominated the quarter
Investor sentiment turned optimistic in the fourth quarter of 2024, as equities rallied to close the year on a high note. Three defining themes shaped the quarter: a historic U.S. presidential election, ongoing central bank rate cuts and a rise in political risks both domestically and abroad. Collectively, these factors drove market movements, creating an optimistic and rewarding environment for investors following the decisive U.S. election.
Global central banks continued to ease their monetary policies, shifting the focus from combating inflation to supporting economic growth and labour market stability. The Bank of Canada (BoC) cut its overnight rate twice by 50 basis points (half a percentage point) each time, for a total reduction of one percentage point during the quarter, bringing the overnight rate to its lowest level in over two years. Similarly, the U.S. Federal Reserve followed its September cut with two consecutive reductions of one-quarter percentage point each.
Market outlook: attractive opportunities in Canadian fixed income
Politics remain front and center with the new U.S. administration taking power. Any tariff would of course be problematic for Canada. Retaliatory action would be inflationary and any support by the Bank of Canada via increased rate cuts would weaken the currency and also be inflationary. The path of longer end rates remains especially uncertain. 30-year Canadian yields are now 150 bps lower than 30-year U.S. Treasury yields. Any increase in inflation would make the sector relatively unattractive to own. It is unclear how attractive investing in Canada would be if it is in the midst of a prolonged trade war with its biggest trading partner.
At current valuation, we consider the corporate bond market expensive. Given this and until there is more clarity on the geopolitical situation between Canada and the U.S., we see no reason to increase credit holdings and would look to improve credit quality and liquidity.
To discuss your investment strategy, speak to your IG Advisor.
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