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Top Canadian bond funds: A great run, but be wary

What we're looking at

Top-performing Canadian bond funds. Technically speaking, the best of the bunch in the Canadian fixed income, Canadian short-term fixed income and Canadian long-term fixed income categories.

Our screen

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We started with all Canadian bond funds that had a history going back 10 years or more and then zeroed in on funds that ranked in the first- or second-quartile returns for the 12 months and 10 years to April 30. Quartiles divide funds in a category into four groups by performance – one is best and fourth is worst.

Funds are ranked here from highest average annual 10-year return on down.

What we found

The numbers shown here are, let's be honest, spectacular. There are funds on this list that have delivered returns similar to what you might conservatively expect from equity funds. If you own any of these funds, enjoy the glow. If you're thinking of putting new money into bond funds, beware.

There's a sharp divide these days in the interest rate outlook between people who see rates rising and those who seem rates holding steady. Either way, you should expect bond funds to perform markedly worse in the years ahead than they have in the past decade.

Remember this basic piece of investing background: Falling interest rates send bonds and bond funds higher in price, rising rates mean lower prices and stable rates mean your returns will be in line with the yield on government and corporate bonds (2 to 3 per cent for the most part right now) minus fees. Interest rates have largely declined in the past decade, and that has provided a huge tailwind for bond funds. Unless the global economy collapses, we simply won't see rates fall in the years ahead. They may very well rise, which could mean losses from bond funds.

Virtually all investors need bonds in their portfolios to act as a cushion when stock markets plunge. But overemphasizing bond funds because they're performed so well is a mistake. Past returns will not be repeated any time soon.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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