Tuesday 11 September 2018 by Kieran Quaine Opinion

The MIPS Income Plus program - Driving high income and high yield

Wholesale investors seeking both high yield and high income from bonds should consider the MIPS Income Plus Individually Managed Account (IMA) Investment program.

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The program takes advantage of FIIG’s unique DirectBond service, investing in a diversified mix of high coupon bearing and high yielding senior and subordinate ranked investment grade and senior ranked non investment grade (unrated) fixed and floating rate bonds. It also invests in investment grade and non investment grade residential mortgage backed securities (RMBS). The combination delivers high, regular cashflow that can be distributed or reinvested.

The Income Plus investor has the ongoing option to choose to receive the regular high cashflow into a nominated bank account, or to reinvest it

Key benefits include:

  • High yield and high cashflow from a diverse portfolio
  • Chose to take regular income or reinvest – a unique advantage unlike investors in unit trusts
  • A $500,000 portfolio will contain 24 bonds
  • Diversified exposure:
    • Reduces portfolio risk
    • Increases the number of payments as each bond pays monthly, quarterly or half yearly
    • Allows the MIPS team to rebalance the investments with minimal disruption to the cashflow

The example portfolio, as at 31 August 2018, is shown in Table 1.

MIPS Income Plus program - Sample Portfolio
1) 6.66% is the weighted average coupon received, calculated and paid as percentage of the asset Nominal Face Value.
2 ) 6.45% is the actual weighted average portfolio Running Yield – the average coupon received as a percentage of the portfolio Market Value.

Source Table 1: FIIG Securities

On average, in excess of $2,500 is paid per month per $500,000 investment.

Where an investor chooses to re-invest income, the DirectBond service delivers by enabling reinvestment from as little as $10,000. If we use the above example, every four months or so, there would be enough cash to increase holdings. But in reality the portfolio is constantly rebalanced given opportunities in the market place.

An extract out of the June 2018 quarterly report

The Portfolio Management Team (PMT) is currently running a short credit spread duration position believing that this point in the interest rate cycle it is too risky to extend duration too long. The strategy aims to deliver appropriate accrual yield advantages as well as maintaining high exposure to investment grade and non investment grade credit, including RMBS. If base interest rates rise sufficiently the PMT would increase duration.

Please refer to the 30 June quarterly report

Investment Strategy

When the PMT rebalances any portfolio for all investor IMAs they replicate the duration and credit exposure of the example portfolios for each relevant investment program using the preferred constituents of the bond universe.

In simplistic terms, a $500,000 investment made on 31 August 2017 would have received income of approximately $8,000 per quarter or $32,000 for the year to 31 August 2018. That income could either be distributed (to an external bank account) or retained within the MIPS portfolio for reinvestment.

Historic returns

In this environment, where base interest rates have been falling to very low levels in conjunction with contracting credit margins, to levels below the rate at which they were issued (par coupons), bonds will trade at premium prices. As a function, the average coupon and the average running yield of the portfolio will be higher than the yield to maturity. This is not to be confused with the portfolio performance, which is derived as a function of asset performance from period to period.

Refer to the following links that provide detailed discussion about the Managed Income Portfolio Service:

  1. < Wholesale Investor Brochure>
  2. (How we) ‘Manage risk in high yield bond portfolios’

For more information, or to open an account please contact Marcus Blake on 0436 345 251 or phone 1800 01 01 82

​Note: MIPS is for wholesale qualified investors only.

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