Protecting Capital
October 8, 2015

Credit Quality in the Pender Corporate Bond Fund

Written by Geoff Castle

Incoming Pender Corporate Bond Fund manager, Geoff Castle, brings a strong credit discipline to the Pender investment team. Here, we focus on how he is addressing the balance between credit quality, default risk and realizing an attractive return in the Fund.

Job one in assuming responsibility for this existing portfolio was to stress-test each investment on credit quality. Having identified a core of strong positions, the Manager focused in on certain securities where the stress-test had highlighted concerns. He undertook a deeper fundamental analysis to fully understand the characteristics of each investment and specifically to identify other supporting credit elements that could offset potential risk.

As a result, the process of moderating the Fund’s risk profile is well in hand. Several positions where the risk/return characteristics appeared unattractive in the current environment have been liquidated. The Fund’s overall credit quality has improved, as indicated by declining default risks, higher interest coverage of holdings and an increased emphasis on securities which are senior in the capital structure.

With credit quality improving, the Manager aims to generate strong, risk-adjusted returns in the zone between a two to four year investment grade credit (currently yielding around 1-2%) and the Canadian high yield index (around 7-8%). Near term returns may be higher than this as he believes several securities contain significant potential for price rebound over the next 12 months. The Fund will remain open to even higher yielding opportunities with attractive risk/return characteristics should these arise. Some elements will not change and the Manager intends to:

  • Keep exposure to interest rate changes low through investment in short term and floating-rate securities.
  • Maintain the Fund’s relatively short duration, in the current interest rate environment.
  • Remain opportunistic and credit focused.

For full standard performance information on the Pender Corporate Bond Fund, click here.