Canadian Tire savings accounts trump O’Leary bond fund

Something peculiar happened to Canadian fixed income mutual funds in 2013. The overwhelming majority lost money; making the term “fixed income fund” a contradiction.

Even one of the best performers in that asset class, O’Leary Canadian Bond Yield, only returned a measly 1.2 per cent.

Investors looking for a safe, “fixed” return would have been better off in a guaranteed investment certificate or a high interest savings account. Implicity Financial pays 3.1 per cent on a GIC and 1.9 per cent on a high interest savings account. Even Canadian Tire Financial pays 1.5 per cent on its savings account – in real money.

Judging by his book titles and TV appearances O’Leary Funds founder and chairman Kevin O’Leary doesn’t like to lose; especially to a hardware store. He actually would have knocked the tam off of old Sandy McTire if it wasn’t for his fund’s 1.2 per cent annual management fee, which helps pay administrative costs, advisors who sell the funds, and – of course – Kevin O’Leary. Without the fee the fund would have returned about 2.4 per cent.

Dark days for bonds

O’Leary bond fund holders might consider themselves fortunate considering the sad state of the bond market right now. While most retail investors simply hold bonds to maturity, big institutional investors often trade bonds for profit in the hope the market will value them higher than new bonds with comparable terms. That’s not happening now because bond yields are rising, and yields on existing bonds are smaller. The O’Leary bond fund holds a mix of corporate bonds from companies like Manulife Financial and Telus. They all pay yields but when returns for the fund are posted the bonds are valued at that point in time.

Bond trading is basically speculating on the future direction of interest rates. When rates were falling, yields were falling, and existing bonds with higher yields were valued higher. In a climate of falling rates, bond funds could bring in double digit returns even though yields were in the single digits.

Fixed income broken

Try telling that to fixed income fund holders who rely on income for day-to-day expenses, such as retirees. If they had to sell at the end of 2013 the average fund had lost 1.8 per cent of its value during the year, and will likely continue to lose value until the interest rate cycle shifts.

Also, try telling that to investors who follow the rules of asset allocation and buy fixed income funds hoping to offset the risk on the equity side of their portfolio.

Novice investors often put their money in bond funds at the suggestion of an investment advisor, who is expected to know that a fixed income fund isn’t really fixed income. Quite often they aren’t really investment advisors at all, but rather mutual fund sales people working for mutual fund companies who pay them commissions.

Real fixed income

Real investment advisors have direct access to bonds and other fixed income products like GICs. They encourage clients who need a stream of income, and can’t afford to lose money, to hold them to maturity.

The most popular way to maximize overall gains is through a strategy called laddering, where maturities are staggered to create many opportunities for investors to collect income or reinvest at the best going rate.

Real advisors normally charge an upfront fee to manage fixed income as part of a broader portfolio but when you compare it with the annual fee on a bond fund, it’s normally a fraction of the cost.

For do-it-yourselfers it’s simpler, cheaper and just as safe to trust their RRSP or TFSA savings with Sandy McTire or his other high interest savings account buddies.