The Canadian corporate bond market is marked by high levels of concentration. In any given year, Canadian corporate bond investors can expect about half of all new bonds brought to the primary market to be by financial issuers. Long bond investors are even more challenged. Driven by index composition, the long bond opportunity set is dominated by energy and infrastructure bonds. Furthermore, seeking long bonds in the secondary market often involves chasing costly bond issues brought to market decades earlier that have been tucked away against liabilities by sticky portfolios at life insurance companies.

This concentration can prevent outcome-focused institutional investors from prudently constructing a portfolio that meets their future obligations.

A recent article published by TD Asset Management Inc. argues that investors shouldn’t passively accept these market shortfalls, nor should they look to the returns of indices as a measure of successful corporate bond investing.

Rather, it is important to remember what institutional investors such as pension plans, insurance companies and endowments and foundations are really seeking with their corporate bond allocation. These institutions are sophisticated long-term investors. Their main investing objective is to be able to meet a future obligation with a high degree of certainty at a reasonable cost.

Characteristics of Buy-and-Maintain Credit Strategies

The incremental risk-adjusted returns delivered by corporate bonds, which are typically higher than the returns of government bonds, can often be an important source of compensation for investors.

When seeking this compensation, it's important to employ independent extensive credit research and active security selection. Diversification beyond Canadian public credit and exposure to U.S. public credit and to private credit is also key, as is ongoing portfolio maintenance.

This type of management is often referred to as buy-and-maintain investing. Through this high-conviction corporate credit strategy, institutional investors of all sizes can make a corporate bond allocations that meets their goals.

Smaller mandates can access pooled funds for immediate exposure to a diversified pool of securities, while larger investors can achieve additional customization through segregated accounts.

For more information, read the full article.

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