New Multi-Sector Fixed Income CIFSC category
By John Krisko
March 21, 2023
The Canadian Investment Funds Standards Committee (CIFSC) is launching a new fixed-income category. Multi-Sector Fixed Income, as the category will be called, intends to “capture fixed income funds that strategically and tactically invest across various fixed income sectors.”
To achieve this, the category will include funds with a multi-sector mandate, with holdings spanning at least three fixed-income sectors over time. Concentration limits in any one sector range from a minimum of 10% to a maximum of 65%. Although not exhaustive, CIFSC identifies the following sectors: government, municipal/provincial; corporate (including preferred shares); securitized (including asset-backed securities, collateralized loans, mortgage-backed securities, etc.); and high yield debt, with geographic exposure spanning both developed and emerging markets.
Greater clarity and more options
Consisting of about 60 funds at launch, the Multi-Sector Fixed Income category will serve to identify and segment a unique type of fixed-income risk/return and investment profile that was previously unrecognized. The majority – about 65% – are migrating from the Global Fixed Income category, with another 30% coming from the High Yield Fixed Income, and the remainder from Global Corporate Fixed Income. Of the 60 funds in the category, 12 are exchange-traded funds (ETFs).
The benefits of the new category for advisors and investors are twofold. First, when structuring a portfolio by CIFSC category, it allows for a more granular composition of the bond portion. Second, it provides less sophisticated investors with an important distinction between these funds and their more general Global Fixed Income and more risky High Yield Fixed Income counterparts.
These funds generally occupy a space between Global Fixed Income and High Yield Fixed Income, with more flexible mandates. While the category is not entirely homogenous, the funds are well diversified, able to shift allocations, and tactically adjust their portfolio to take advantage of market conditions.
Avoiding unnecessary risk
Two excellent representative options in the new category, which both earned a Fundata FundGrade A+ Award in 2022, are Fidelity Multi-Sector Bond Fund and PIMCO Monthly Income Fund (Canada), which is also offered as an ETF. Both funds were transferred from the Global Fixed Income category. These are two examples of standout multi-sector bond funds that that have been able to deliver superior risk-adjusted performance due to their ability to shift allocations according to changes in the investment landscape.
Both funds have significantly outperformed the Global Fixed Income category over all time frames with comparable volatility in 3-, 5-, and 10-year annualized returns and standard deviations (see accompanying table).
As stated on its website, PIMCO Monthly Income Fund (Canada) follows a classic multi-sector approach, while relying on PIMCO’s well-known bond expertise to “seek out the best income-generating ideas in any given market climate, targeting multiple sources of income from a global opportunity set.”
Similarly, according to the fund’s online features sheet, Fidelity Multi-Sector Bond Fund “seeks to offer investors attractive total return and income with the flexibility to navigate changing fixed-income markets. With an ever-changing global economic landscape, investors need a flexible fixed-income solution that targets multiple sources of returns.”
These funds highlight the definition of Multi-Sector Fixed Income strategies – responding to changing market conditions and taking advantage of the best opportunities available. Even with a common approach, the specific sectors that a fund targets and how their allocations shift over time depends on the manager’s analysis and focus. This leaves room for tailoring a Multi-Sector Fixed Income allocation to investor’s specific needs, depending on goals, risk tolerance and time horizon.