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Video - Bond Investment Strategy

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In this clip, our expert Michel Doucet explains bond investment strategies. He provides an overview of fixed-income securities, the role bonds play, what influences their performance, and why to invest in them.

SUBJECT : Bond Investment Strategy

EXPERT : Michel Doucet

VERSION : English

Note: The information in brackets "[...]" describes the visual and audio content of the video other than the dialogue or the narration.

[Elegant music begins. Different parts of Desjardins Securities' head office appear on screen including, primarily, the prestigious trading floor where many employees work.  These images give way to a shot of the firm's logo and the dsia.ca website. This shot gives way to Mr. Michel Doucet, whom we see appearing on a balcony overlooking the trading floor where employees are busy working].

Michel Doucet (CIM, BA (Economics), Vice-President and Portfolio Manager): Hello.I am Michel Doucet, Portfolio Manager, Vice-President and Director of the Portfolio Advisory Group at Desjardins Securities.

It is my pleasure to talk to you today about investment strategies in the fixed-income securities sector, with a focus on bonds. 

The world of fixed-income securities encompasses a broad range of securities, including bonds and preferred shares. These securities have the advantage of generating a predictable income flow in the form of interest, on bonds, or dividends, from preferred shares. Fixed-income securities are a vital component in a diversified investment portfolio. Remember that a portfolio’s long-term return yield variation is more than 90% asset allocation related.

Bonds form the largest category of fixed-income securities. The worldwide bond market amounts to about $45 trillion. Bonds are complex and sophisticated investment products. Managing them involves more than just cashing in the interest and reinvesting the capital at maturity.

Like stocks, bonds are influenced by a number of variables. First among them is, unquestionably, the economic and financial background. Next come credit analysis, future reinvestment possibilities, liquidity and, of course, changes in the yield curve, which reflects the expectations of investors as a whole. We also need to remember that there exists an inverse relationship between a bond’s price and its yield. When the price rises, the yield declines, and vice versa. 

There are many reasons for investors to put funds into a bond portfolio. But what they seek above all is a balance between stability and yield. In their toolkits, portfolio managers have various strategies to optimize returns.

Among them is a strategy of exploiting interest rates. This enables managers to alter the sensitivity of their portfolios based on interest rate variations to benefit from their own forecasts. This is done by extending or shortening a portfolio’s duration.

As a manager, if I expect a rise in interest rates, I will advocate a shorter duration to protect the portfolio’s value. On the other hand, if I expect a decline in interest rates, I will favour a longer duration so as to optimize the portfolio’s return.

These adjustments in duration will be done through a specific positioning between short-term maturities, medium-term maturities or long-term maturities.

Portfolio managers can also opt for a strategy aimed at exploiting the yield curve to benefit from anticipated changes in the shape of the interest rate curve.

Another strategy aims to gain advantage from credit or default risk gaps between categories of issuers. If, for example, the risk premium associated with an issuer showed greater deviation from its long-term average, even if this was not justified by fundamental and/or cyclical factors, the manager could decide to go overweight or underweight in one type of issuer compared to another one.

For example, as a portfolio manager, I could go overweight in municipal bonds relative to Canada bonds if the yield gap between these types of issuers exceeds their long term average.

Finally, the manager could institute a strategy of substitution between bonds. This consists of exchanging some bonds for others that are broadly similar following discovery of a price imbalance or simply to obtain a better yield.

In conclusion, active management of bonds aims to raise an investment portfolio’s long-term return while giving it greater stability. Over time, the bond market, like the equity market, has become volatile, and financial products are increasingly sophisticated. Desjardins Securities has the expertise, the rigour and the discipline to navigate in this investment world and to suggest strategies that meet investors’ varying needs. 

Our investment advisors are in a position to advise you and to guide you in instituting an investment strategy that matches your investor profile, your specific needs and your risk tolerance.

We are looking forward to meet you.

[The music begins again. The dsia.ca website address appears in the middle of the screen and the following text appears at the bottom of the screen « Desjardins Wealth Management Securities is a trade name used by Desjardins Securities Inc. Desjardins Securities Inc. is a member of the Investment Industry Regulatory Organization of Canada ( IIROC ) and the Canadian Investor Protection Fund (CIPF). ». These images end with the Desjardins Securities logo. ]

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