PAID CONTENT
and Client Portfolio Manager, Fixed Income at
CIBC Asset Management.
Fixed income is a cornerstone in any portfolio — and there are now solid new possibilities in the space.
Driven by demand from its clients and advisor channel, CIBC Asset Management recently introduced a series of investment-grade, target maturity bond solutions. They join a strong fixed income lineup, with CIBC Asset Management holding about C$90 billion in fixed income assets under management (as of March 31, 2024).
The firm manages everything from passive to fully active and liquid alternative funds, and it offers fixed income solutions to individual investors and some of Canada’s largest pension plans alike. They have a 30-person fixed income team, along with a dedicated credit research team.
Aaron Young, Vice-president & Client Portfolio Manager, Fixed Income, explains why this is an opportune time for investors, his firm’s approach, and the appeal of the new CIBC Asset Management offerings.
Q: Why is this a great time for fixed income investors?
Aaron Young: We think there are two tailwinds. First, the income is actually back in fixed income. This asset class has retaken its original role within clients’ portfolios: generating a stable, attractive income. That was tougher to come by before; you really had to go up the risk curve to get there.
Second is the potential for capturing upside. People who historically haven’t invested in fixed income may be surprised at how well the bond market can provide capital appreciation. That’s especially a function of how fixed income performs against a stable or falling interest rate backdrop. As rates lower, bonds offer attractive upside and investors get paid to wait thanks to higher yields across the asset class.
Q: Has the role of fixed income changed within a sound portfolio?
AY: When equities have a tough year, the theory is that bonds pick up the slack. That equation doesn’t work well when rates are near zero. It undermines fixed income as a capital preservation asset class. The tide has clearly turned. Now, with yields where they are, we think bonds have reclaimed their rightful place as a natural hedge within a total portfolio.
Q: Where do you see interest rates going?
AY: Rates drive the bond markets. There’s a bit of a divergence now between the U.S. and Canada. U.S. macroeconomic data continues to be quite strong. That puts a lot less pressure on the Federal Reserve to start cutting rates. It has more runway to maintain rates where they are. Canadian consumers are spending less as high rates bite into disposable income, and the Bank of Canada has more impetus to start cutting sooner.
Q: What was the thinking behind the launch of your CIBC Investment Grade Bond Funds lineup?
AY: Coming out of the pandemic, clients fell into behavioural biases. If you had the traditional 60/40 portfolio, you experienced a pretty bad year. That pushed clients to question their investment strategies. Combine that with the highest rates on cash investments, like GICs and high-interest savings accounts, and a lot of client money moved to the sidelines to earn near 5% or 6% interest rates.
Clients want to see stability. While GICs play a role in a portfolio, we thought the bond market was offering a viable complement. We designed the funds to offer similar characteristics to the GIC experience, but with added value: diversification, more attractive yields, and the purchase of discount bonds that rely less on income as part of a total return. We saw this as a way for advisors to leverage CIBC’s longstanding fixed income platform over buying individual bonds. We use our size to source a diversified portfolio of bonds that still offer a set maturity date.
Q: The new funds have maturities from 2025 through 2030. What sort of investor requirements does this meet?
AY: These are very much purpose-driven, target maturity solutions. If your client has cash-flow requirements in one to five years, you want something that satisfies the need for principal returned at that date, but that also offers the opportunity of diversified exposure and the possibility of realizing more capital gains over income. This is one of the best ways to do it.
The funds provide access to a wide array of high-grade government and corporate bonds, while maintaining the certainty of cash flow you get in a GIC or individual bond. And, for advisors, this is the easiest way to get those characteristics in a packaged solution.
The beauty of these solutions is that they’re not perpetual investments. They have an end date. If you have a client with cash-flow needs, here are tools that, if you hold to maturity, aim to produce an attractive total return and have that cash flow.
Q: What does CIBC Asset Management add to make these new target maturity bond offerings stand out?
AY: Investing in fixed income markets continues to be a game of size and infrastructure, making it harder for individual investors to access. Our size and long history managing bonds gives us a natural advantage in the marketplace.
We’re going to all the major dealers in Canada and the U.S. to source good bond prices for our clients. The corporate bonds we own have also been vetted by our independent credit research analysts. They stress test the quality of these issuers beyond fair-weather predictions and rating agencies. We underwrite the risk ourselves. That gives us peace of mind to buy these bonds and hold them to maturity.
Q: Is the focus always on generating the best yields?
AY: For these funds we’re trying to maximize take-home yield for clients within the timeframe of each fund’s maturity date while maintaining prudent levels of risk. They’re an elegant solution to meet a client’s cash-flow needs in the near term. But growing wealth over time, and long-term capital appreciation, is still best served by our other strategies that focus on delivering total returns. A combination of both, driven by purpose for the client, makes a lot of sense.
