Protecting Capital
October 9, 2015

Risk and Opportunity 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 sector exposures and the areas of opportunity he sees in the market.

Commodities

During the first eight months of 2015, the Fund held significant exposure to commodities, which has impacted year-to-date performance. In taking over the Fund, Mr. Castle has reviewed all commodity holdings carefully. Given major commodity price indexes are lower than the crash of 2009 and in line with the trough price levels of various economic cycles over the past two decades, the risk/return profile of certain credits is now attractive. However, we have eliminated those credits where default risk was more prevalent, where the Fund’s position was in subordinated securities of entities which were at risk of not meeting interest payments. However, a number of the Fund’s commodity-related positions are composed of very senior claims with strong cash flow coverage even at currently depressed prices, and these senior positions have been retained. The net result of this activity has been a somewhat lower allocation to the commodity area (approximately 20%) with generally improved credit quality and strong cash yields.

Sector Approach

Going forward, the Manager sees opportunities across a variety of sectors and holders should expect broad diversification of industry risk. Recently added weightings in healthcare, media and financial services augment strong continuing holdings in retail, transportation, business services, resources and consumer discretionary sectors. The Manager shares the Pender orientation towards owning securities issued by companies in growing industries with strong competitive positioning and low relative costs in comparison to their competition. Companies where intrinsic value is increasing provide a much larger margin of safety, regardless of where you are invested in the capital structure.

“The direction we have set is clear and unambiguous,” said Mr. Castle. “We intend to own a diversified pool of liquid securities which have robust risk/reward characteristics, solid credit quality and, in the current interest rate environment, short duration. I believe this portfolio will deliver attractive cash returns within acceptable levels of volatility. We have made significant progress in improving credit within the portfolio and the securities are very attractively priced at present.”

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