The better fixed income fund outperforms and improves the entire portfolio

Kevin Foley is Managing Director, Institutional Accounts at YTM Capital

Most advisors evaluate fixed income funds on one number: return. If the fund beats the comps, it earns a place in the portfolio. If it doesn't, it doesn't.

That's a reasonable starting point. It's also an incomplete one.

Before return even enters the conversation, do you know what's actually in the fund? Labels are misleading. Investment grade / fixed income / bond fund - these terms cover an enormous range of assets, risk profiles, and liquidity conditions. Making sure the underlying securities align with what you actually want in a fixed income sleeve is the first filter. Too many add high yield and even equity exposure where they shouldn’t.

Once you've cleared that bar - perhaps shortlisting by track record and years since inception - the real work begins. And here’s the rub: the characteristics that actually determine whether a fixed income fund improves your client's total portfolio are sometimes noted, yet rarely quantified. Not because they can't be. Because the framework for doing so hasn't been clearly defined.

What follows here is that framework, illustrated using the YTM Capital Credit Opportunities Fund (COF) alongside the FTSE Canada Universe Bond Index since COF inception (July 2015 - April 2026). COF is a short-term, investment grade credit fund that eliminates most of the rate risk. Its metrics are used because they make the argument clearly - and compellingly.

The illustrative portfolio is a $1,000,000 60/40 (XIU/XBB - the iShares Core Canadian Universe Bond ETF, which tracks the FTSE Canada Universe Bond Index), with a 33% allocation of the fixed income sleeve shifted to COF - approximately 13% of total portfolio. This is a meaningful but defensible reallocation within a standard mandate.

1.  Low Correlation Reduces Portfolio Volatility - Creating Risk Capacity You Can Redeploy

COF has a correlation of 0.22 to the FTSE Universe Bond Index. Most advisors note this as a positive and move on. They should stop here longer.

When two assets with low correlation are held together, combined volatility is lower than either held alone - not because either is less risky individually, but because they don't move together. This has a direct, quantifiable portfolio effect.

Fixed Income Sleeve Volatility - Before and After

Source: Morningstar Direct. Blended volatility calculated using reported standard deviations and COF's correlation of 0.22. Illustrative only.

A 14% reduction in fixed income sleeve volatility translates to ~28bps of lower total portfolio volatility. In a portfolio running at its risk limit, that freed capacity is room to add return-seeking exposure elsewhere without breaching a mandate. In a 60/40 portfolio, COF's correlation benefit creates ~50-70bps of additional equity allocation capacity, worth an estimated 25-35bps of additional annual return on top of everything else below. The risk budget didn't change, but the portfolio got more out of it. A direct portfolio comparison confirms this: substituting 13% of a standard 60/40 into COF reduced total portfolio volatility from 8.74% to 8.59% - observed, not estimated.

2.  Negative downside capture: your fixed income is finally doing its job

Bonds exist in a portfolio for two reasons: income and shock absorption. For most of the past decade - and catastrophically in 2022 - the FTSE Universe Bond Index delivered neither when it mattered most.

COF has a downside capture ratio of -27.09 versus the FTSE Universe Bond Index. Negative is good here. When the index fell, COF didn't fall with it - it gained. A fixed income fund that gains when the bond index loses is doing the job of two asset classes at once: income in normal environments, protection precisely when it's needed most. In a direct portfolio comparison, adding COF reduced total portfolio downside capture from 71.06 to 54.53 - a 23% improvement in how the whole portfolio behaves when markets fall.

In 2022, the FTSE Universe lost 11.69%. COF lost 0.40%. The index holder then needed to earn 13.2% just to get back to flat, a recovery that took until February 2026. On a $1,000,000 portfolio, that interrupted compounding represents ~$50,000-$60,000 of permanently foregone wealth. Not just a bad year - a structural failure of the building block.

3.  Shallower Drawdowns Mean the Compounding Engine Never Stalled

Source: Morningstar Direct.

The mathematics of loss are asymmetric and permanent. A fund that loses 15% needs 17.6% to recover. COF's worst drawdown of 9.15% needed only 10.1%. From September 2023 to February 2026 - 29 months - the FTSE Universe was underwater. COF's maximum drawdown since inception was recovered in ~5 months. That gap is a permanent, non-recoverable difference in wealth accumulation - and it applies in any rate environment, not just this one.

4.  A Sharpe ratio of 0.00 means your risk budget has been working for free

The FTSE Universe Bond Index has delivered a Sharpe ratio of 0.00 since July 2015. COF has delivered 1.04. A Sharpe of 0.00 doesn't mean the index was safe, it means every unit of volatility it contributed to a client's portfolio generated zero compensation. Your clients could have held cash and achieved the same risk-adjusted outcome with less volatility. Replacing that with COF's Sharpe of 1.04 raises the blended Sharpe of the entire portfolio - confirmed by observed data showing a standard 60/40 improving from 0.63 to 0.71 with a 13% COF allocation. That improvement shows up as outperformance at the total portfolio level, not just in the fixed income sleeve.

5.  Return outperformance: the number everyone sees - now seen in full context

COF has returned 6.41% annualized since inception versus 1.88% for the FTSE Universe Bond Index - 4.53% more per year, net of all fees, over more than a decade. With an alpha of 4.45%, virtually none of that outperformance is attributable to market movement. Every portfolio benefit described in this article is structural, not cyclical. That's the conversation worth having with clients.

Trailing Returns - COF vs FTSE Universe Bond

Source: Morningstar Direct. Returns are net of all fees.

In our example’s 13% portfolio allocation, COF's +4.53% annual outperformance contributes +0.60% to total portfolio return every year - confirmed by observed portfolio data. Compounded over 10 years on a $1,000,000 portfolio, that difference alone is worth $65,000 in additional wealth - observed, not estimated, before a single portfolio benefit above is counted.

Conclusion: The cumulative portfolio effect

The table below quantifies three of the five portfolio benefits in dollar terms. COF's downside capture contribution and Sharpe improvement - while not separately isolatable without double counting - add conservatively an estimated 20-35bps of additional annual portfolio value. Together, the true annualized value of a COF allocation to the total portfolio is closer to 7.3-7.6% versus 1.88% for the index, supported by observed portfolio data showing a real 60/40 delivering 7.95% annualized with COF versus 7.35% without it.

Note: These figures reflect an above-average equity return period. In a more normal equity environment - where XIU trends toward its long-run 8-9% - the fixed income sleeve carries more of the portfolio's weight, and the COF effect within it is larger. The $115,000 is a floor, not a ceiling.

*Based on historical COF data since inception (July 2015-April 2026) and observed portfolio comparison data. Assumes $1,000,000 60/40 portfolio, 33% COF allocation within fixed income sleeve (~13% of total portfolio). Equity risk premium assumption: 4-5% above fixed income, long-run historical basis. Return outperformance reflects observed portfolio data. All figures are for illustrative purposes and not a guarantee of future results. Past performance may not be repeated. Source: Morningstar Direct.

Your fixed income allocation could be doing so much more for your clients' risk management, capital preservation, and total portfolio returns than you are currently measuring. There’s real opportunity there.

Return versus benchmark is where the conversation starts. Correlation, downside behavior, drawdown depth, and risk-adjusted efficiency are where it should continue - because those are the characteristics that determine what a fund actually contributes to a portfolio, not just what it earns in isolation.

The return was always there, and now you have the rest of the picture. The advisor who can walk a client through this analysis is having a conversation most others aren’t having.

Performance data from Morningstar Canada is from July 1, 2015 - April 30, 2026. Fund net returns are Class F, distributions reinvested, and the SI figure is annualized. Investors should read the Offering Memorandum, including the risk section, before investing. Past fund performance and risk will not be repeated.

Kevin Foley is Managing Director, Institutional Accounts, at YTM Capital, a Canadian asset manager specializing in credit and mortgage funds. He spent two decades in capital markets at a major Canadian bank and serves on several Canadian foundation boards and investment committees. 

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