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moneysense.ca, 7/07/09
PH&N Inflation-Linked Bond Fund: Active management at a low-fee
When it comes to new financial products, I like to nitpick or even criticize. Undoubtedly, in most cases, the criticism is thoroughly deserved. But occasionally a product is introduced that deserves praise. The latest instance is the announcement of an inflation-linked bond fund by Phillips, Hager & North (now owned by Royal Bank).
The actively-managed fund will invest in real-return bonds and other inflation-linked securities but the main attraction is the low-fees. The Series D units, available directly from PH&N (minimum account size is $25,000) or RBC Direct Investing (minimum of $10,000 per fund per account), have an ultra-low MER of 0.45%, which compares rather favourably with the 0.35% MER of the iShares CDN Real Return Bond ETF (XRB). The fund is also available in Series C (MER of 0.80% including a trailer of 0.50%) and Series F (MER of 0.30% for fee-based accounts). The fund profile is available here and the PH&N website also has a periodic table showing the need for diversifying fixed-income assets. Morningstar’s Rudy Luukko’s take on the inflation-linked bond fund can be found here.
PS: Thanks to Jon Chevreau and Cam Birch for the heads-up on the introduction of the fund.
PPS: The votes have been tallied in the Globe and Mail “Best of the blogs” feature and the winners announced. Million Dollar Journey, Squawkfox, Wellington Financial Blog, Where Does All My Money Go?, Four Pillars and Thicken My Wallet finished in the top ten. Thanks to the Globe and Mail for the opportunity to contribute to the list and thanks to you for voting for your favourites.
moneysense.ca, 7/07/09
PH & N has consistently issued good product. I am happy that they have maintained this with this offering. Hope RBC doesn’t kill what makes PH & N a good shop.
I am curious how does one aquire the Series F? I assume one way is to have a fee based financial advisor, but is there a different way?
Most of us are DIY and hiring an Advisor just to get the best MER doesn’t seem quite the right way to go. Plus I doubt many financial advisors would be completely happy if they cannot give advice.
@Thicken: It is nice to see PH&N + Royal combination being a good thing. I can’t recall a non-index fund that is this closely competitive with ETFs.
@Cam: Unfortunately, we are out of luck. Series F is only available through advisors. Don’t even get me started on why investors at discount brokers have to pay trailers — after all, they don’t receive any advice.
The last time I checked, which admittedly is a couple of years ago now, the Government of Canada has only issued 3 series of Real Return Bonds. I personally bought some of the series that matures in 2036.
Why on earth would anybody want to buy a mutual fund of any security of which there are only 3 issues in existence? And why would anybody want to buy a bond fund that is marked to market and has no maturity date where you get back your principal? It doesn’t make any sense to me whatsoever…
I am with Phil S ’s comment on maturity dates
RRBs are a lot less risky when you can assure yourself of an amount at afixed maturity date. These things can still fall in value if interest rates rise due to inflation and with no maturity date to correct it, unitholders are stuck and forced to suffer the cash flows in and out of other investors. The same is true for ETFs, so if an investor doesn’t care about this, then PH&N at least has low fees.
I’d be interested in the CCs take of holding RRBs on their own versus in a fund/ETF
Why was Canadian Capitalist not included in the blogroll to find the most popular site. I guess it was because the blogger here was part of the selection process etc. If it were included it would have won hands down because this is head and shoulders above the crowd in the blogosphere. I read it everyday without fail
Keep up the good work and the excellent posts
rajeev
[...] Capitalist is a fan of active management afterall… well, you’ll see what I [...]
@Phil S, @Rob: I don’t think you have quite grasped the concept. This is a mutual fund, they purchase RRB as their investment tool (rather than regular bonds or stocks). A fund like this will properly ladder the bonds to ensure a regular cashflow and avoid undue risk. Also they are not required to purchase Canadian Government Bonds, they can purchase provincial bonds, or even bonds issued by companies if they meet the qualifications. They are also intending to have a 30% foreign content in this fund, though they are not restricted to such.
An investment like this is to have some liquidity in RRB purchases. The fund manages that for you, you just get to sit back and enjoy the ride.
All fund purchases Mutual or ETF have a cost for convenience. Ideally everyone would have properly laddered bonds and an excellent portfolio, because we cannot quite so easily there are some simpler ways out. This is not for everyone but it is a viable product, properly researched.
@Phil: I believe we have 4 RRB bonds today maturing in 2021, 2026, 2031 and 2036. There are two advantages that a low-cost fund would offer: (1) Ability to buy in small amounts. Buying bonds directly would mean an outlay closer to $5,000 for one bond. However, this may not be an issue if the allocation to RRBs is small to begin with. (2) Presumably, institutional investors can obtain much better pricing on bonds compared to individuals. Again, this may not be an issue for an investor hoping to hold the bonds to maturity and not intending to sell to rebalance the portfolio.
@Rob: Investors like myself hold bonds for lowering portfolio volatility. As such, the expectation is bonds would be bought / sold when rebalancing the portfolio. Since bonds are not held for generating income, the volatility in prices is a desirable attribute; not something that should be avoided.
@rajeev: Thanks for your kind words. I feel honoured that the Globe asked for my picks.
@Cam: Actually, Phil and Rob’s point is valid for investors drawing down income from a portfolio and have shorter-term investment horizons. They can avoid the volatility that comes with bond funds by investing in the bonds directly.
With a minimum purchase of $25k for individual investors, I don’t really see the benefits of this fund vs the iShares ETF. Am I missing something?
Thanks for the mention – it was fun to be included in the G&M poll once again.
I was looking for this fund at RBC Direct Investing. It is hard to find as it is not listed in the PH&N listings. The only fund I could find was the Series A (PHN650). I found this by first going to the PH&N website. RBC does not give an MER for this fund so I didn’t buy any. Can anyone help me here?
Well I don’t have much to add to this convo after reading all the responses. I do enjoy reading your blogs though, thanks again and take care!
@Doug: Now that you’ve mentioned it, I looked up the fund on RBC Direct. You are right. They don’t list this fund. A quick call to RBC Direct should clarify matters. Can you let us know what you find out?
After talking to PH&N this fund (actually Series D but called Series A on RBC Direct Investing website) has the symbol PHN650. The expenses are management fee 0.45% + operating expenses 0.05% for a total of 0.50%. There is no commission for purchase.
Thanks for your research Doug. MER of 0.50% isn’t bad for a mutual fund with no commissions to buy and sell compared to 0.35% MER for XRB. It would be nice if the minimum investment were lower though