It’s clear that the effects of lower oil prices on the Canadian economy are worrying for some as the Bank of Canada surprised markets last week by decreasing interest rates by 25 basis points.
Of the 22 economists surveyed prior to the announcement, not one predicted a rate decline. Even the experts were stumped. This reinforces our view that predicting specific interest rate changes is an exercise in futility.
The rate cut further depressed bond yields. Canadian five- and 10-year government bonds now yield 0.79% and 1.45% respectively versus 1.50% and 2.40% as little as a year ago. These are significant shifts that we couldn’t have anticipated. Our already low interest rate environment just went even lower.
Since we don’t think we can make money predicting rates, we continue to focus instead on corporate bonds. Sure, a lower interest rate environment doesn’t benefit our low duration fixed-income investments. However, the rate reduction has come at an interesting time.
The silver lining is that oil’s drop has put pressure on a significant portion of the U.S. and Canadian high-yield market that we believe is creating opportunities. High-yield funds have seen material outflows recently, spreads are widening and U.S. rates are now higher than Canada’s. As a result, we recently added several new positions to our Growth & Income Portfolios.
Fixed-income investing à la EdgePoint
Fixed-income managers tend to mimic the index and don’t deviate materially from duration, sector or credit ratings. At EdgePoint, we’re not afraid to look different. While we’re aware of the index, we don’t let it dictate our investment approach.
Our balanced portfolios are broad mandates that offer Frank and the team the flexibility to allocate capital to either equities or fixed income depending on where they see the best potential return. That’s the EdgePoint advantage.
EdgePoint Global Growth & Income Portfolio
A balanced portfolio concentrated in fixed-income investments and quality businesses from around the world that have the potential to grow their value.
EdgePoint Canadian Growth & Income Portfolio
A balanced portfolio concentrated in fixed-income investments and quality Canadian businesses that have the potential to grow their value.