March 05, 2025

The history of credit is the history of commerce itself. From the time ancient civilizations began exchanging goods and services, crude credit systems anchored in trust were required. Indeed, the word “credit” has its roots in the French and Italian words for trust and faith.

Traditionally, to invest in credit has been to put capital into domestic investment grade and high yield bonds. At CC&L Private Capital, we have expanded our credit strategies to cover more areas of the world as well as different types of investments by including emerging market credit, North American high yield, and mortgages.

We combine these investment types because by doing so, we have the opportunity to improve upon the anticipated portfolio yield and returns of traditional bonds without increasing portfolio volatility over time. Specifically, we target 3% over the traditional bond index.*

Designed for advantage: CCLPC Enhanced Income Portfolio

The CCLPC Enhanced Income Portfolio is designed as an attractive portfolio of credit investments that are diversified across geography and investment type. 

Current yield is 6.1%.⁽²⁾ Target added value is 3.0% over core bonds.⁽³⁾

Source: CC&L Private Capital. ⁽¹⁾ As at February 28, 2025. ⁽²⁾ As at February 28, 2025. Yield is a weighted average of its components. FTSE Short Term Index + 3.00% used as a proxy for commercial mortgages yield. ⁽³⁾ Target added value based on expectations over a full market cycle and is a function of beta (approx. 200bps) and alpha (approx. 100bps).

Specifically, the assets in the portfolio include both long and short positions on United States (US) and Canadian high yield credit, and emerging market sovereign and corporate credit (all of which offer an anticipated long-term return that may exceed the traditional bond index by 4% p.a.); as well as commercial mortgages (with a long-term expected return premium of 2% over the index), and residential mortgages (0.5% over the index). It is the Canadian residential mortgage market where we feel increased regulatory oversight is opening new opportunities to investors. 

New strategy: residential mortgages

The case for credit

Credit as an asset class has performed well over the past several years and remains attractive from an absolute return perspective. While equity returns have been stellar, investors should be cautious about expecting such a performance to extend into the future. Current stock valuation and return levels may well fall more in line with historic levels in 2025 and beyond. 

The current yield on our CCLPC Enhanced Income Portfolio is 6.1%.⁽²⁾ If equities revert to more traditional return levels of 8-10%, this could make credit look increasingly attractive – particularly as credit returns come with less volatility than equities. For these reasons, we believe that a diversified allocation to credit alongside our other fixed income asset classes has a place in client portfolios, and that credit as an asset class may continue to perform well in the year ahead.

Conclusion

We are constantly considering ways to improve portfolio composition by bringing in a new asset class, or by adjusting an existing asset class in a way that helps to meet desired return objectives. Incorporating Canadian residential mortgages in our credit portfolio, alongside our emerging market credit and North American high yield holdings, is one such example. This latest expansion in our credit strategy enables us to offer a consistent income and attractive returns without increasing an overall portfolio’s volatility. For investors looking for a broader range of fixed income exposure through a diversified portfolio of attractive credit, the CCLPC Enhanced Income Portfolio has a place in their overall portfolio of investments, as it offers an attractive yield relative to traditional fixed income. 

Footnote: *“Traditional bond index” refers to the FTSE Canada Universe Bond Index, which offered 3.3% as of 02/28/2025.

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