Choosing Fixed Income Assets to Meet my Target Allocation

I need to get my asset allocation in line with respect to my fixed income investments. I introduced this briefly in my most recent portfolio review. I have drastically bumped up my fixed income target allocation in my portfolio and now need to slowly adjust my portfolio to bring it in line. This was recently done with the Global Equity portion, although I am still about 5% off my target for that asset class and will also be working on that. As a reminder, here is my asset allocation as it looks today:

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Time to start looking at some fixed income choices for my portfolio. Fixed income can mean many things from money market instruments which have little to no risk or long-term corporate bonds that can have as much risk as stocks. Fixed income assets can also mean assets that provide a consistent and reliable stream of income. It all depends on which fixed income instruments you choose. A crucial step is determining the objectives for the fixed income portion of an overall portfolio – is it to have cash available to invest in mis-priced assets, to provide steady income, or is it to temper the standard deviation of a portfolio.

My objective for the fixed income portion of my portfolio is to reduce the volatility of my stock market portfolio. As readings from William Bernstein highlight, the standard deviation on fixed income instruments is significantly less than domestic and global stocks. The table below presents the standard deviations for various asset classes:

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By choosing the correct fixed income investment I can essentially earn returns similar to the market with less risk than an all-stock portfolio. Of course, I am not meet the market every year, but over the long term (15+ years) my hope is that I at least match the market.

So what are my investment options? Through my pension plan at my employer, I have access to a fund called the CC&L Bond Fund:

The CC&L Group Bond Segregated Fund is a segregated fund that invests in units of the Connor, Clark & Lunn Group Bond Fund (the “Bond Fund”). The Bond Fund is well diversified among issues by sector and term to maturity. The Fund holds no less than 60 issues of investment grade bonds with an average quality rating of AA.

As a large portion of my monthly savings goes to my pension fund, it makes sense to allocate my employer and employee contributions to this fund. I would MUCH rather have access to an index fund but that is not an option at this time (I have raised it with our pension plan administrators). In addition, I would rather have access to a fund that focuses on the short to intermediate term bond market. This is another recommendation from Bernstein based on his research.

In addition, I am going to use my CSA account to purchase some fixed income holdings. The short-term bond offering that I have access to is the CDN Short Bond index Fund (XSB). The average maturity 3.35 years and the holdings includes corporate and government bonds. The MER is capped at 0.25% and it tracks the Scotia Capital Short Term Bond Index. Over the next few months I am going to be investing in both the CC&L Fund and the iShares fund to bring them up to my target allocation of 20%.