Manager Views

Adding value to your portfolio with fixed income

Steve Locke has been a fixed-income manager for the last 16 years, and currently oversees $11 billion for Mackenzie Financial. He is also responsible for the fixed income portion of Mackenzie Saxon Balanced Fund – the #1 ranked Canadian equity balanced fund over the last 20 years.¹ In the following article Locke discusses his approach to building and managing portfolios.

Please tell us about your background.

I’ve been with Saxon and Howson Tattersall Investment Counsel, which was acquired by Mackenzie, for the past seven years. I began my career in the early 90s with MetLife, where I was heavily involved in managing a money market portfolio, bond trading and corporate credit analysis, with an emphasis on both public and private placement debt. I’ve brought a lot of those skills with me to the way I manage Mackenzie Saxon Balanced Fund.

Before we talk more about your investing strategy, give us your outlook for the economy.

After the credit crisis began to ease-off, and as the large amount of monetary and fiscal stimulus kicked in, the Canadian economy expanded strongly in the first quarter of 2010. But as some of that stimulus is now being removed, we should see slower economic growth over the next few quarters.

There’s a lot of talk about inflation. What’s your opinion?

To help stimulate credit markets in the wake of the crisis, many private sector debts have been shifted to governments. We’re now dealing with high sovereign debt loads in Europe and many other developed economies. Deleveraging is still a major secular theme as we look ahead, and that’s going to be a drag on economic growth. So I’m not worried about a significant rebound in inflation at this point.

What does your investment style offer investors in Saxon Balanced Fund?

When you look at the investment-grade (high quality) bond focus of the holdings in Saxon Balanced, they offer less volatility when compared to a high-yield basket of corporate debt. By combining our investment-grade focus and corporate overweighting with Saxon’s traditionally low-volatility equity investments, we generate greater risk-adjusted returns for investors.

The Saxon Balanced Fund maintains a 70/30 equity-fixed income asset mix. Why is that?

One of the principles of Saxon Balanced Fund is that we don’t time the market with the asset mix. So we maintain a 70/30 split whether the economy is good or bad. That’s something investors can count on as part of our Methodology, and it’s something that has contributed to the fund’s strong long-term results.

What does it mean to actively manage your fixed-income assets?

With other balanced funds there is a lot of passive bond management where managers simply buy and hold government bonds and maybe some high-quality corporate bonds. But they’re not really managing those overall holdings to get the best value. One of the key things that’s produced strong returns for us over the past few years, has been by actively managing the corporate credit component by expanding and contracting those holdings at the right point in the investment cycle.

How have you positioned the funds to minimize the impact of rising interest rates?

In addition to shortening the average term of the portfolio, when interest rates are rising we typically hold what we call a barbell position. Imagine the shape of a weightlifter’s barbell. The weights are on the ends and there’s not much weight in the middle, so that’s what we do with our bond portfolio. We position it for an expected flattening of the yield curve when short-term rates are rising and longer-term rates aren’t maybe doing much of anything, by holding both short and long-term bonds.

¹ Source: Morningstar PALTrak at July 31, 2010

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return as of June 30, 2010 are the historical annual compounded Investor Series total returns including changes in unit/share value and reinvestment of all distributions/dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any investor that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Inception date of Mackenzie Saxon Balanced Fund and Mackenzie Saxon Stock Fund is December 1985