Savings Fund Commentary

March 31, 2012

Market Overview

  • The Bank of Canada left its key short-term lending rate unchanged in the first quarter at 1.0%. It has been at this level since September, 2010.
  • In its March statement, the central bank noted that conditions in global financial markets have improved and risk aversion has decreased, but the global economy is expected to grow below its trend rate, and considerable monetary stimulus (in the form of low short-term interest rates) is still justified.
  • The Bank expects inflation to remain at around 2% over their forecast horizon.

Portfolio Specifics

  • It’s been a difficult environment in which to add yield, as the government’s key lending rate remains close to historic lows.
  • After moving out of Government of Canada T-Bills last spring, the manager (Connor, Clark & Lunn Investment Management Ltd.) re-initiated a position in these securities. Provincial T-Bills were trimmed to fund the purchases. The spread between provincial and federal T-Bills narrowed in the quarter, reducing the relative attractiveness of the former.
  • The weighting in corporate paper was decreased modestly, while exposure to bank paper was increased. Short-term bank-issued notes now comprise roughly 50% of the portfolio. Corporate paper continues to provide the highest yields, but the advantage over bank paper is only 1-2 basis points (0.01% - 0.02%).
  • The average term to maturity of the portfolio is shorter than normal.
  • The pre-fee yield of the fund at the end of December was 1.1%.

Notable Transactions

  • The manager increased the portfolio’s weighting in federal government T-Bills from 0% to 25%.
  • The weighting of corporate paper was reduced while proceeds from maturing notes were invested in other securities.

Positioning

  • CC&L continues to structure the portfolio with a shorter-than-normal average term-to-maturity and expects to maintain this positioning until the market starts to anticipate future rate hikes by the Bank of Canada.
  • Short-term interest rates are still very low and we have maintained a reduced fee on the fund (0.20%) to help provide a reasonable yield for unitholders.