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The Hurdles Facing Foundations Have Never Been Higher

Responding to a higher disbursement obligation in a lower return environment

In light of the Government of Canada's decision to increase the disbursement quota for foundations, we believe foundation executives and trustees should look to “Active Credit” to improve the return potential of their fixed income allocation.

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What Should An Allocator Do With Their Core Bond Portfolio?

Faced with a challenging return environment, pension and endowment investors are presented with some difficult choices. We believe that a thoughtful unbundling of the fixed income allocation can help investors preserve liquidity needs and generate more income than a traditional core allocation without increasing portfolio risk.

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2021 Sustainability Report

At RPIA, 2021 was an important year for our ESG evolution as we refined our ESG philosophy and began our own ESG journey. Our 2021 Sustainability Report details how we continue to incorporate ESG into our firm operations, investment management philosophy, and our goals for 2022.

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Our Solutions

Our Solutions

We serve a broad range of investors through a variety of solutions catering to their unique investment goals. We apply our differentiated active skillset in all our strategies, which vary from low-risk to higher-risk. Although our toolkit and risk/return levels vary across our suite of products, our credit expertise, proprietary technology, and rigorous risk management is applied throughout. We have collaborated closely with institutional investors in developing several of our strategies to ensure that the portfolio mandate aligns with their long-term investment objectives.

RPIA Develops Carbon-Reduced Fixed Income Solution

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Investment Process

Investment Process

RPIA's approach is to apply a highly active, dynamic investment process that enables us to consistently extract value from the global credit market, driven by security selection. Investors do not need to compromise on credit quality or sacrifice liquidity to improve their portfolio returns. Our active approach can be distilled into four steps:

1. The Investment Committee uses their expertise and experience to collaborate and identify a key theme based on prevailing macroeconomic conditions.

2. The Credit Research Team conducts deep-dive research to determine the most compelling issuer, drawing from their knowledge of the sectors each team member covers.

3. We utilize our proprietary technology and expertise to identify the most attractively priced bond within that issuer's capital structure

4. The Portfolio Management Team sizes the position accordingly within the strategy based on factors such as conviction level, existing exposures, and liquidity considerations to name a few.

The entire process is overseen by our independent Risk Management Team and Committee who analyze policy constraints, stress testing, and concentrations across strategies.

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Our Strategies

Our Strategies

RPIA offers a range of investment strategies reflecting our investors' diverse risk and return objectives. Our flagship institutional long-only strategy is RP Broad Corporate Bond, which has evolved into a suite of strategies for specific goals in collaboration with investors. In addition to our institutional-focused mandates, we also offer absolute return-focused strategies.

1. Long-Only Strategies

  • RP Broad Corporate Bond
  • RP Broad Corporate Bond (BBB, Carbon-Reduced)

2. Alternative Credit & Fixed Income

  • RP Debt Opportunities
  • RP Select Opportunities
  • RP Fixed Income Plus

3. Mutual Funds

  • RP Strategic Income Plus Fund
  • RP Alternative Global Bond Fund
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ESG

ESG

RPIA considers Environmental, Social, and Governance ("ESG") factors when making investment decisions for all the strategies we manage. When we include these factors alongside traditional financial metrics, we can think more broadly about risk and make more prudent investment decisions. In other words, it is in the best interests of our investors to integrate ESG into our process. Through our in-depth credit research, we are in regular communication with the management teams of the issuers in which we invest. We have also partnered with an institutional investor to design a strategy that targets specific ESG outcomes and, in this case, an Environmental outcome. We have been a signatory to UN PRI since 2018 and have several other industry memberships ( learn more).

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Explore Our Funds

RP Broad Corporate Bond

This actively managed credit strategy's primary objective is to outperform the FTSE Canada All Corporate Bond Index net of fees in a risk-controlled manner. The strategy aims to add value through superior credit selection across global credit markets and avoid uncompensated interest rate risk by remaining duration-neutral versus the benchmark.

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RP Broad Corporate Bond (BBB, Carbon Reduced)

An actively managed credit strategy whose primary objective is to outperform the FTSE Canada Corporate BBB Index net of fees by 100 bps on an annualized basis. The strategy extends on our longstanding Broad Corporate Bond investment process by including explicit ESG targets. Investments in tobacco and munitions are prohibited, and the strategy aims to keep the carbon intensity at least 30% lower than the index.

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Market Commentary

Seeking Opportunity in Rising Yields

May, 2022

Since the beginning of 2021, bond holdings have posted double-digit losses and weighed down portfolio performance.1 However, as is often the case in markets, with pain comes opportunity. Despite the potential for continued short-term volatility, we believe the time to  increase bond allocations for intermediate and long-term investors is now.

Anticipated Rate Increases are Largely Priced into Higher Yields

Suggesting that fixed income looks attractive is wildly unpopular today, but it should be recognized that the market has already priced in an additional 2.25% increase in rates from the US Federal  Reserve, even after their most recent 50bps hike last week – that is equivalent to 9 quarter-point  hikes from now until May 2023.2 Under this assumption, the “terminal rate” (the rate at which  markets believe the Federal Funds Rate will peak in this hiking cycle) will approach 3.25% in the US.

It is a similar story in Canada. The overnight rate sits at 1.0% after the latest 50bps rate hike in April, while the yield on the 2-year government bond sits at approximately 2.7%.3 This means that an  investor can effectively buy bonds and “lock in” a good amount of the anticipated increases in rates  today, even though they may not fully come to fruition.

In fact, the market’s ongoing attempt to gauge the future path of interest rates has been “feast or famine.” We went from a limited number of quarter-point hikes expected at the turn of the year to  perhaps the most aggressive rate-hiking cycle in recent history. While the true path will be data-dependent,  it may be reasonable to assume that the potential upper range of hikes is priced in.  More importantly, the concept of margin of safety is reinstated at these yield levels, meaning the  greater income stream being offered can provide a cushion to total returns even if the adverse  dynamics of the current bond environment were to persist.

Active Management: Building a Base of Attractive Bonds

The Federal Reserve’s asset holdings are primarily made up of Treasuries and mortgage bonds backed by government agencies. These assets were more than doubled during the pandemic from $4.2 trillion to $8.9 trillion until March 2022, when the Fed officially stopped adding to its balance sheet.4

Just as Quantitative Easing drove interest rates down, Quantitative Tightening can be expected to put pressure on them to rise. The expectation for an increasing trajectory of interest-rate hikes alongside a contracting Fed balance sheet has been the key reason treasury yields soared in the first quarter of 2022.

If markets have underappreciated the potential impact of quantitative tightening, it could be the driver of more short-term volatility in bond markets. But again, given the anticipated terminal rate, we think there is enough cushion for investors to begin picking up bonds now, with a chance for capital gains if these measures turn out less aggressive than anticipated in the next 12 months.

Corporate Bonds Trading at Attractive Levels 

In addition to higher risk-free rates, investors can further increase their yield pick-up by taking a  modest amount of credit exposure. The investment grade bond market offers a nearly 4.4% all-in yield today, a level that has eclipsed the 20-year average yield and is approaching pandemic levels. 

IG Corporate Yields Have Eclipsed the 20-Yr Average showing US IG Corporate Yield versus the 20yr average

But this doesn’t mean that investors should blindly lock in the highest yield possible – as many of the highest yielding bonds can also come with uncompensated interest rate risk and/or credit risk.

Against this backdrop of wider spreads and the sharp sell-off in rates, the level of yield support has notably improved across a variety of fixed income markets. We believe yields at these levels can provide critical upside if the Fed decides to re-evaluate and slow down over the next 12-months or inflation begins to crest and surprise us on the way down.

Buy the Dip Mentality for Bonds  

Investors hold bonds because no other asset class has consistently done what they historically have – preserve capital if held to maturity (defaults are very rare for investment grade bonds) and generate modest returns.

The proverbial “buy the dip” methodology has worked wonders for equity investors over the past decade. We think investors can use a similar strategy with bonds at these levels to help insulate their portfolios prudently and keep them aligned with their risk profiles better than other income-oriented asset classes.5 As an aside, bonds are also beginning to look attractive relative to beloved equities.

Fixed Income is Beginning to Look Attractive Relative to Equities showing equity risk premium vs the long-term average

Active Management: Building a Base of Attractive Bonds

We believe you need to pick away in stages to take advantage of the opportunity right now. We recognize that each new data point and headline could spawn further volatility, but we are advocating  for a gradual re-entry without trying to pick the proverbial “bottom of the market.”

For example, we want to buy bonds today that will give us a predictable downside scenario over the next 2-3 years, but that has upside capital gains optionality if spreads tighten from here due to an  improving economy or avoiding a recession, idiosyncratic fundamental improvements, and/or other  technical market catalysts that offer relative value.

To illustrate, the table below shows how our strategies are taking advantage of yield opportunities in the market without taking on nearly as much interest rate risk as Canadian and US Corporate Bond  indices.

RPIA Strategies Can Provide Reasonable Yield Without Taking on Undue Interest Rate Risk showing RP AGB, RP DOF, Canada Corporate Bond Index, and US Corporate Bond Index (CAD hedged) for YTM, Interest Rate Sensitivity (yrs), and Yield to Duration ratio

Year-to-date, the market volatility has allowed us to increase all-in yields while limiting interest rate exposure and reducing credit risk metrics. For example, RP Alternative Global Bond Fund’s yield has  increased +151bps while its rate sensitivity has only increased +45bps, all while its credit leverage  has been reduced by -25%. This helps highlight how we pursue attractive risk-adjusted yields and not  focus solely on absolute yields, which can come with uncompensated amounts of risk.

Figure 4 - YTD Change in Yield, Interest Rate Sensitivity, and Leverage showing RP DOF and RP AGB for Net Credit Leverage (% change), Interest rate sensitivity (bps), and YTM (bps)

This is an exciting time for us as bond investors. The coming months should give us the opportunity to turn the page from solely a capital preservation focus to a more balanced stance as we search for compelling return opportunities for our investors.

 

 

 

 

 

1 As of May 6th, 2022, the Bloomberg Barclays Global Aggregate Bond Index has suffered a drawdown of -16.7% since January 2021.

2 Source: CME FedWatch Tool, CME Group Inc. (www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html). Data retrieved May 6th, 2022.

3 Source: Bank of Canada. Data retrieved May 6th, 2022. 

4 Source: Federal Reserve. Data as of May 4th, 2022. US Total Assets Held By All Federal Reserve Banks.

5 For example, cash might protect your capital, but you’ll lose purchasing power over time, thanks to inflation. Treasury Inflation-Protected Securities (TIPS) and floating-rate loans can have negative yields if deflation comes to pass over the coming year. Granted, commodities, cryptocurrency, and gold can diversify your equity holdings. Still, all of these bring new risks to the table and do not come with any guarantees or maturities backed by a business or its cash flows.

 

Important Information

The information herein is presented by RP Investment Advisors LP (“RPIA”) and is for informational purposes only. It does not provide financial, legal, accounting, tax, investment, or other advice and should not be acted or relied upon in that regard without seeking the appropriate professional advice. The information is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does RPIA assume any responsibility or liability whatsoever. The information provided may be subject to change and RPIA does not undertake any obligation to communicate revisions or updates to the information presented. Unless otherwise stated, the source for all information is RPIA. The information presented does not form the basis of any offer or solicitation for the purchase or sale of securities. Products and services of RPIA are only available in jurisdictions where they may be lawfully offered and to investors who qualify under applicable regulation. “Forward-Looking” statements are based on assumptions made by RPIA regarding its opinion and investment strategies in certain market conditions and are subject to a number of mitigating factors. Economic and market conditions may change, which may materially impact actual future events and as a result RPIA’s views, the success of RPIA’s intended strategies as well as its actual course of conduct.

RP Debt Opportunities is offered pursuant to available prospectus exemptions to eligible Canadian investors through units of RP Debt Opportunities Fund Trust respectively. Investor level fund performance may differ from the strategy level performance presented. RP Alternative Global Bond Fund is a mutual fund offered pursuant to a simplified prospectus in all applicable Canadian jurisdictions and are subject to applicable securities law and regulations.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Indicated rates of return include changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Returns for time periods of more than one year are historical annual compounded total returns while returns for time periods of one year or less are cumulative figures and are not annualized. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The compound growth chart is used only to illustrate the effects of a compound growth rate and is not intended to reflect future values or returns of the Fund. Performance presented for RP Alternative Global Bond Fund is for Class F of the fund. Class F units does not include embedded sales commissions, which results in higher performance relative to Class A units of the fund. Performance data for RP Alternative Global Bond Fund is calculated in accordance with NI 81-102.

The index performance comparisons presented are intended to illustrate the historical performance of the indicated strategies compared with that of the specified market index over the indicated period. The comparison is for illustrative purposes only and does not imply future performance. There are various differences between an index and an investment strategy or fund that could affect the performance and risk characteristics of each. Market indices are not directly investable and index performance does not account for fees, expense and taxes that might be applicable to an investment strategy or fund.

 

ESG Articles

Seeking Opportunity in Rising Yields

May, 2022

Since the beginning of 2021, bond holdings have posted double-digit losses and weighed down portfolio performance.1 However, as is often the case in markets, with pain comes opportunity. Despite the potential for continued short-term volatility, we believe the time to  increase bond allocations for intermediate and long-term investors is now.

Anticipated Rate Increases are Largely Priced into Higher Yields

Suggesting that fixed income looks attractive is wildly unpopular today, but it should be recognized that the market has already priced in an additional 2.25% increase in rates from the US Federal  Reserve, even after their most recent 50bps hike last week – that is equivalent to 9 quarter-point  hikes from now until May 2023.2 Under this assumption, the “terminal rate” (the rate at which  markets believe the Federal Funds Rate will peak in this hiking cycle) will approach 3.25% in the US.

It is a similar story in Canada. The overnight rate sits at 1.0% after the latest 50bps rate hike in April, while the yield on the 2-year government bond sits at approximately 2.7%.3 This means that an  investor can effectively buy bonds and “lock in” a good amount of the anticipated increases in rates  today, even though they may not fully come to fruition.

In fact, the market’s ongoing attempt to gauge the future path of interest rates has been “feast or famine.” We went from a limited number of quarter-point hikes expected at the turn of the year to  perhaps the most aggressive rate-hiking cycle in recent history. While the true path will be data-dependent,  it may be reasonable to assume that the potential upper range of hikes is priced in.  More importantly, the concept of margin of safety is reinstated at these yield levels, meaning the  greater income stream being offered can provide a cushion to total returns even if the adverse  dynamics of the current bond environment were to persist.

Active Management: Building a Base of Attractive Bonds

The Federal Reserve’s asset holdings are primarily made up of Treasuries and mortgage bonds backed by government agencies. These assets were more than doubled during the pandemic from $4.2 trillion to $8.9 trillion until March 2022, when the Fed officially stopped adding to its balance sheet.4

Just as Quantitative Easing drove interest rates down, Quantitative Tightening can be expected to put pressure on them to rise. The expectation for an increasing trajectory of interest-rate hikes alongside a contracting Fed balance sheet has been the key reason treasury yields soared in the first quarter of 2022.

If markets have underappreciated the potential impact of quantitative tightening, it could be the driver of more short-term volatility in bond markets. But again, given the anticipated terminal rate, we think there is enough cushion for investors to begin picking up bonds now, with a chance for capital gains if these measures turn out less aggressive than anticipated in the next 12 months.

Corporate Bonds Trading at Attractive Levels 

In addition to higher risk-free rates, investors can further increase their yield pick-up by taking a  modest amount of credit exposure. The investment grade bond market offers a nearly 4.4% all-in yield today, a level that has eclipsed the 20-year average yield and is approaching pandemic levels. 

IG Corporate Yields Have Eclipsed the 20-Yr Average showing US IG Corporate Yield versus the 20yr average

But this doesn’t mean that investors should blindly lock in the highest yield possible – as many of the highest yielding bonds can also come with uncompensated interest rate risk and/or credit risk.

Against this backdrop of wider spreads and the sharp sell-off in rates, the level of yield support has notably improved across a variety of fixed income markets. We believe yields at these levels can provide critical upside if the Fed decides to re-evaluate and slow down over the next 12-months or inflation begins to crest and surprise us on the way down.

Buy the Dip Mentality for Bonds  

Investors hold bonds because no other asset class has consistently done what they historically have – preserve capital if held to maturity (defaults are very rare for investment grade bonds) and generate modest returns.

The proverbial “buy the dip” methodology has worked wonders for equity investors over the past decade. We think investors can use a similar strategy with bonds at these levels to help insulate their portfolios prudently and keep them aligned with their risk profiles better than other income-oriented asset classes.5 As an aside, bonds are also beginning to look attractive relative to beloved equities.

Fixed Income is Beginning to Look Attractive Relative to Equities showing equity risk premium vs the long-term average

Active Management: Building a Base of Attractive Bonds

We believe you need to pick away in stages to take advantage of the opportunity right now. We recognize that each new data point and headline could spawn further volatility, but we are advocating  for a gradual re-entry without trying to pick the proverbial “bottom of the market.”

For example, we want to buy bonds today that will give us a predictable downside scenario over the next 2-3 years, but that has upside capital gains optionality if spreads tighten from here due to an  improving economy or avoiding a recession, idiosyncratic fundamental improvements, and/or other  technical market catalysts that offer relative value.

To illustrate, the table below shows how our strategies are taking advantage of yield opportunities in the market without taking on nearly as much interest rate risk as Canadian and US Corporate Bond  indices.

RPIA Strategies Can Provide Reasonable Yield Without Taking on Undue Interest Rate Risk showing RP AGB, RP DOF, Canada Corporate Bond Index, and US Corporate Bond Index (CAD hedged) for YTM, Interest Rate Sensitivity (yrs), and Yield to Duration ratio

Year-to-date, the market volatility has allowed us to increase all-in yields while limiting interest rate exposure and reducing credit risk metrics. For example, RP Alternative Global Bond Fund’s yield has  increased +151bps while its rate sensitivity has only increased +45bps, all while its credit leverage  has been reduced by -25%. This helps highlight how we pursue attractive risk-adjusted yields and not  focus solely on absolute yields, which can come with uncompensated amounts of risk.

Figure 4 - YTD Change in Yield, Interest Rate Sensitivity, and Leverage showing RP DOF and RP AGB for Net Credit Leverage (% change), Interest rate sensitivity (bps), and YTM (bps)

This is an exciting time for us as bond investors. The coming months should give us the opportunity to turn the page from solely a capital preservation focus to a more balanced stance as we search for compelling return opportunities for our investors.

 

 

 

 

 

1 As of May 6th, 2022, the Bloomberg Barclays Global Aggregate Bond Index has suffered a drawdown of -16.7% since January 2021.

2 Source: CME FedWatch Tool, CME Group Inc. (www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html). Data retrieved May 6th, 2022.

3 Source: Bank of Canada. Data retrieved May 6th, 2022. 

4 Source: Federal Reserve. Data as of May 4th, 2022. US Total Assets Held By All Federal Reserve Banks.

5 For example, cash might protect your capital, but you’ll lose purchasing power over time, thanks to inflation. Treasury Inflation-Protected Securities (TIPS) and floating-rate loans can have negative yields if deflation comes to pass over the coming year. Granted, commodities, cryptocurrency, and gold can diversify your equity holdings. Still, all of these bring new risks to the table and do not come with any guarantees or maturities backed by a business or its cash flows.

 

Important Information

The information herein is presented by RP Investment Advisors LP (“RPIA”) and is for informational purposes only. It does not provide financial, legal, accounting, tax, investment, or other advice and should not be acted or relied upon in that regard without seeking the appropriate professional advice. The information is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does RPIA assume any responsibility or liability whatsoever. The information provided may be subject to change and RPIA does not undertake any obligation to communicate revisions or updates to the information presented. Unless otherwise stated, the source for all information is RPIA. The information presented does not form the basis of any offer or solicitation for the purchase or sale of securities. Products and services of RPIA are only available in jurisdictions where they may be lawfully offered and to investors who qualify under applicable regulation. “Forward-Looking” statements are based on assumptions made by RPIA regarding its opinion and investment strategies in certain market conditions and are subject to a number of mitigating factors. Economic and market conditions may change, which may materially impact actual future events and as a result RPIA’s views, the success of RPIA’s intended strategies as well as its actual course of conduct.

RP Debt Opportunities is offered pursuant to available prospectus exemptions to eligible Canadian investors through units of RP Debt Opportunities Fund Trust respectively. Investor level fund performance may differ from the strategy level performance presented. RP Alternative Global Bond Fund is a mutual fund offered pursuant to a simplified prospectus in all applicable Canadian jurisdictions and are subject to applicable securities law and regulations.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Indicated rates of return include changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Returns for time periods of more than one year are historical annual compounded total returns while returns for time periods of one year or less are cumulative figures and are not annualized. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The compound growth chart is used only to illustrate the effects of a compound growth rate and is not intended to reflect future values or returns of the Fund. Performance presented for RP Alternative Global Bond Fund is for Class F of the fund. Class F units does not include embedded sales commissions, which results in higher performance relative to Class A units of the fund. Performance data for RP Alternative Global Bond Fund is calculated in accordance with NI 81-102.

The index performance comparisons presented are intended to illustrate the historical performance of the indicated strategies compared with that of the specified market index over the indicated period. The comparison is for illustrative purposes only and does not imply future performance. There are various differences between an index and an investment strategy or fund that could affect the performance and risk characteristics of each. Market indices are not directly investable and index performance does not account for fees, expense and taxes that might be applicable to an investment strategy or fund.

 

Relationship Team

 
Headshot of Liam O'Sullivan

Principal, Co-Head of Client Portfolio Management

Headshot of Ann Glazier Rothwell

Principal, Co-Head of Client Portfolio Management

Headshot of Zach Barsky

Vice President, Client Portfolio Management