BCI Annual Report

F2021-Corporate-Annual-Report

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Fixed Income OUR APPROACH BCI's fixed income program invests in public and private market debt. We offer clients a diverse range of products, including government and corporate bonds, and private debt. Our strategies include yield curve and credit spread positioning, duration timing, sector and security selection, and leverage. The private debt program provides exposure to opportunities in Canada, the United States, and Europe through our partnerships with top-tier private debt managers. Issuers within our pools are assessed and reviewed regularly for default and credit risk. We use internally and externally produced credit ratings to assess credit risk. Additionally, we actively integrate ESG factors into our investment analysis and decision-making. We continue to strengthen our internal fixed income capabilities for managing credit strategies and increase allocations to strategies that offer higher risk-adjusted returns. In the past few years, BCI has significantly expanded access to fixed income credit products and capabilities, notably through the Corporate Bond Fund and the Principal Credit Fund. We also facilitated the use of leverage by some of our clients in their long-term strategic asset allocation through the launch of the Leveraged Bond Fund. Our clients have begun to make explicit strategic asset mix allocations to government bonds and corporate credit. These changes allow clients to consider risk and liquidity separately when deciding on their strategic asset mix, so that allocation decisions are directly aligned with the characteristics of each asset class. To facilitate this new approach, we launched the Government Bond Fund in February 2021, which provides clients with exposure to high quality, liquid government bonds. The fund will operate in parallel with the Leveraged Bond Fund and when these funds are paired with the Corporate Bond Fund and/or the Principal Credit Fund, our clients' exposures will align more closely with their liquidity needs and fixed income risk and return objectives. Optimizing $71.2 billion of global bond and private credit allocations to meet client objectives PERFORMANCE ANALYSIS The strong relative and absolute performance of the funds reflects the defensive positioning of the portfolio prior to the pandemic, and BCI acting on the opportunities that arose during the market sell-off. The Corporate Bond Fund primarily holds investment grade and high-yield corporate bonds issued in the United States and Canada. The fund aims to deliver strong absolute and relative returns over the long term through disciplined credit selection. Since inception in April 2018, the fund has generated an annualized return of 7.1 per cent against the benchmark of 5.4 per cent. The team delivered strong returns while deploying almost $2.7 billion of new capital. Lower U.S. Treasury yields led to a one-year return of 15.1 per cent against a benchmark of 14.5 per cent. The outperformance resulted from defensive positioning heading into the pandemic, combined with the team's ability to recognize and capture investment opportunities as the crisis unfolded. The Principal Credit Fund has delivered strong performance since inception in April 2018. With 95.0 per cent of the portfolio invested in secured first lien loans and with limited exposure to cyclical credits, the fund was well-positioned for the market downturn resulting from the pandemic. We added a fourth strategic partnership during the year and continue to strengthen our investment sourcing efforts. Following a very strong relative performance in fiscal 2020, the fund returned (1.1) per cent against a benchmark of 1.8 per cent for the one-year period. Valuation lags and volatility in publicly traded benchmarks will cause the fund's yearly performance to significantly vary. 2 0 2 0 - 2 0 2 1 C o r p o r a t e A n n u a l R e p o r t M a n a g e m e n t ' s D i s c u s s i o n a n d A n a l y s i s 3 3

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