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Where to find yield as bond proxies weaken

Canadian dividend and income funds have seen net redemptions of $1.4 million so far in 2015

Since the primary trend in bond yields has been down since 2009, defensive yield stocks such as pipelines, utilities, REITs and telecoms have were able to outperform the broader market. These so-called bond proxies have risen 125 per cent since the market’s 2009 lows, versus a gain of 95 percent by the S&P/TSX composite index.

But with bond yields rebounding this season, the defensive segment has become the worst performer around the TSX, which has Martin Roberge, portfolio strategist at Canaccord Genuity, wondering if that’s made a buying opportunity or perhaps a trap.

Based on mutual-fund flows in the Canadian equity space, he sees more weakness ahead for bond proxies.

Defining defensive flows as those entering balanced (50 per cent stocks) and dividend/income equity funds, momentum is trending downward for. Roberge noted that net redemptions of $1.4 million for dividend/income funds in 2015 so far mark the first such pullback in several years.

The strategist also pointed towards the strong correlation between your trend in defensive fund flows and the relative performance of bond proxies.

“This is not a pretty picture,” he said. “What is more, the decline in ‘defensive’ flows is going on while the relative valuation of bond proxies towards the S&P/TSX is still very wealthy. To the extent that the equity market is facing a rising interest-rate environment within the next year, apart from REITs, valuation among bond proxies may not be low enough to attract new buyers.”

There has not yet been a meaningful shift in sentiment toward Canadian cyclical sectors, but Roberge nonetheless recommends investors search for dividend income in cheaper resource areas such as energy and materials, as well as in non-resource cyclical yielders like financials, industrials and consumer discretionary names.