2023 Performance

In 2023, the fixed income portfolio earned 8.48%, compared to a benchmark return of 7.66%. This success came mainly from a higher allocation to corporate credit than the benchmark.

Strong economic growth in the US and Canada led yields significantly higher in late summer and early fall. The shift higher in yields resulted in negative year-to-date returns in fixed income up until the end of October.

The final two months of the year saw a sharp reversal in the direction of yields. Inflation continued to decline, which increased the probability that interest rates could be cut as soon as the beginning of 2024.

Investment Approach

We manage the fixed income portfolio with a focus on liquidity and safety. The portfolio’s sector weights, curve, and duration are determined by an overall view of the economy. We also look for trading opportunities within and amongst the different sectors.

To ensure we can sell our investments quickly, we invest in the largest issuers in the market. These tend to be regulated utilities and other infrastructure-related companies. Because of their size in the benchmark, the Big Five Canadian banks tend to make up the bulk of corporate holdings.

Sector Allocation

We started the year with a corporate weighting of 40% (25% benchmark). Credit spreads were wide to begin the year and, as a result, the mix of carry and potential for spread tightening was favourable for generating excess return.

After a regional banking crisis early in the year widened credit spreads by 30 basis points, we increased our corporate weighting to 45%.

Thanks to strong economic growth and the highest yields since 2008, spreads tightened 40 basis points by year end. As corporate spreads tightened, we decreased corporate exposure to 38% and increased provincial exposure from 37% to 40% (43% benchmark). The biggest reduction in corporate exposure occurred in longer dated maturities where valuations were the most stretched due to a lack of corporate new issue supply.