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Enhancing bond returns with diversified credit

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

In the third quarter of 2024, we began investing in Canadian residential mortgages. We targeted underserved areas of the market, including the self-employed and recent immigrants, and our residential mortgage allocation is well-diversified across borrower type and location. 

Critically these mortgages provide consistent income with limited volatility. This may enable us to lower the overall volatility of our credit assets, while achieving a similar risk profile to that of traditional bonds. Without these mortgages, portfolio returns would be less efficient and more volatile, reducing our ability to allocate to credit as an asset class in client portfolios.

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.

Disclaimer

This material, including any attachments, is provided for informational purposes only. This material is intended for the use of the recipient only and no matter contained herein may be separately used, disseminated, distributed, reproduced or copied by any means, in whole or in part without express prior written consent of Connor, Clark & Lunn Private Capital (CC&L Private Capital). Certain information contained herein is based on information obtained from third-party sources that CC&L Private Capital considers to be reliable. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of capital may occur. All opinions, estimates and projections contained in this material constitute CC&L Private Capital’s judgment as of the date of this material, and are subject to change without notice. This material has been prepared without regard to the particular individual financial circumstances and objectives of persons who receive it and nothing in this material constitutes legal, accounting, tax or individually tailored investment advice. Readers should consult with independent professionals regarding their individual circumstances, as applicable. This information is not an offer to sell or a solicitation of an offer to buy any securities and is not to be used as a sales communication.

Third-party disclaimer

This material may contain information obtained from third parties such as: Merrill Lynch, Pierce, Fenner & Smith Incorporated (BofAML), S&P Global Ratings, MSCI, and Morningstar’s Wealth Forecasting Engine. Source: Merrill Lynch, Pierce, Fenner & Smith Incorporated (BofAML), used with permission. BofAML permits use of the BofAML indices related data on an "As Is" basis, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the BofAML indices or any data included in, related to, or derived therefrom, assumes no liability in connection with the use of the foregoing, and does not sponsor, endorse, or recommend Connor, Clark & Lunn Private Capital Ltd. or any of its products. This may contain information obtained from third parties, including ratings from credit ratings agencies such as S&P Global Ratings. Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. MSCI makes no express or implied warranties or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. This report is not approved, reviewed or produced by MSCI.

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Catherine Dorazio
Managing Director
Business Development

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