Canada’s Top High-Yield Bond Fund Benefits From Early Teck Bet

  • Toronto-Dominion fund has returned more than 7% this year
  • Opportunities ahead in technology, autos, cable and housing

Gregory Kocik’s early bets on Teck Resources Ltd. and other basic materials debt have paid off, making his TD High Yield Bond Fund the top performer in Canada amid a commodity-led surge in junk bonds.

The manager of the C$1.3 billion ($1 billion) fund at Canada’s second-biggest bank said adding to holdings in the bonds of copper miners and steelmakers in the third quarter helped his fund return 7.8 percent this year. That beat out 10 other Canada-domiciled funds with assets of at least $1 billion that invest in junk bonds, according to data compiled by Bloomberg.

“We were hurt a little bit in 2015 because we were too early,” the 54-year-old managing director at TD Asset Management Inc. said by phone from Toronto. “But by sticking with this exposure, and increasing it actually through the worst of the selloff, we got some additional benefit.”

Investors who bought corporate bonds of commodities producers have been reaping the rewards after oil rebounded almost 90 percent from its February low and steel prices in the U.S. gained 62 percent this year. The Bank of America Merrill Lynch BB-B U.S. High Yield Index, the TD fund’s benchmark, has returned 6.9 percent, the biggest gain for the first five months of the year since 2009.

Kocik said the key to the improved market sentiment was clarity from the U.S. Federal Reserve about planned interest rate increases earlier this year. Investors were concerned about the pace of interest rate hikes, he said.

Turning Point

“That was, to me, the turning point of this whole market,” he said. “That stabilized the U.S. dollar and that helped commodity prices. That was the black hole that was scaring everybody.”

Basic materials companies make up about 5 percent to 6 percent of his fund, with energy comprising 2 percent to 3 percent. The remaining holdings include cable companies, healthcare providers, auto parts producers and merchant power suppliers, he said. Teck Resources, the Vancouver-based producer of copper, zinc and coal, and United States Steel Corp. are two basic material companies Kocik bought last year, although he cautioned that he wasn’t necessarily bullish on the market fundamentals.

“We have no idea if met coal or zinc is going to improve this year,” he said. “Teck Resources was simply a play on a company with a lot of liquidity, a lot of assets for sale, and so far it’s working out.”

Kocik, who manages TD’s high-yield group with more than C$4 billion in bonds, started buying Teck in September and October, he said. The company’s 4.5 percent bond maturing in 2021 has climbed to about 85 cents on the dollar from a December low of less than 46 cents. Teck raised another $1.25 billion from two bond sales last week, a further sign of investor confidence in the commodities sector.

The TD High Yield Bond Fund has largely avoided energy for several years due to concerns about the price of oil, Kocik said. Meg Energy Corp., a Calgary-based oil producer, and Precision Drilling Corp., an oil services firm, are two energy companies that Kocik likes because of their ability to reduce spending and wait for the price to recover, he said.

The Meg 6.5 percent bond maturing in 2021 has recovered to about 78 cents on the dollar from a low of 34.8 cents in February. Precision Drilling’s 6.625 percent bond maturing in 2020 has jumped to 88.5 cents from 61 cents in February.

Any investments the fund makes in commodity-based companies are driven by whether they have enough cash and access to credit lines to survive during a bad cycle, said Kocik, whose firm runs more than C$300 billion and is a unit of Toronto-Dominion Bank.

“I’m not sure if this recovery is going to be a straight line,” he said. “At the very least I think they’ve stabilized in some range. I wouldn’t make investments based on the expectation of commodity prices improving over the next 12 months.”

Autos, Housing

The commodities recovery has “a little bit more to go,” but investors have to be selective with names, Kocik said. He’s looking elsewhere for opportunities. Technology is the next area of fairly deep value, he said. He bought Western Digital Corp., a video storage company in California, last year.

Another two years of high but stable demand for autos and growing demand for housing present good opportunities for suppliers in those sectors, Kocik said. He also likes lower-yielding but stable cable companies and hospital operators, he said. His biggest bets include HCA Holdings Inc., a U.S. health-care company.

“The opportunity is clipping a coupon of 5, 6, maybe up to 7 percent in some cases for non-commodity names,” he said. “Not a very high coupon but a lot better than 1 percent on a government bond.”

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