Wednesday 31 October 2018 by Leigh Winton Opinion

Model portfolios from our investment strategy team

Our Investment Strategy Group regularly publish model portfolios. Here department head, Leigh Winton details our suggestions

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In this article we showcase three portfolios with varying characteristics to help clients target their risk and return objectives. The portfolios are:

  1. A Conservative 100% AUD investment grade portfolio yielding approximately 4.35%pa
  2. A Balanced portfolio comprising investment grade and high yield AUD bonds, yielding approximately 5.50%pa
  3. A High Yield portfolio which includes AUD and foreign currency bonds yielding approximately 6.50%pa

The yields quoted above are the weighted average yield to maturity (YTM) of the portfolio as at 30 October 2018.

For the floating rate bonds, we estimate a fixed rate from an average Bank Bill Swap Rate (BBSW) assumption via an interest rate swap curve. For inflation linked bonds our models assume 2.5% inflation, which is the RBA target mid-point of 2.00%-3.00%.

You can click on the links at the end of the article to see the portfolios.

Portfolio themes

These portfolios each have a minimum of ten securities enabling a good level of issuer diversification. This fits with our theme of limiting individual issuer exposure, otherwise known as single name concentration risk.

Each of the portfolios has a mix of fixed, floating and inflation linked bonds. Below we have suggested bands for the allocation of each of those security types.

Ratings wise, we look to incorporate a spread of differing ratings within the portfolio, although due to restrictions we are unable to display the ratings in this article. If you are a wholesale client, please ask us for the individual ratings. We do display the area of the capital structure where our securities sit, although we currently bucket senior secured and senior unsecured debt into one group called senior.   

Sector wise, we look to have a spread across differing industries, although we generally have an overweight position in Infrastructure and Other Corporate in the Conservative and Balanced portfolios. This is due to Infrastructure typically being a stable sector exhibiting low volatility and Other Corporate covering a large band of issuers across varying sub sectors.

In terms of the summaries for the portfolios, the initial investment amount is $1m for the Conservative and Balanced portfolios and $1.5m for the High Yield portfolio. The other attributes are the weighted averages for the YTM, the purchase margin being the estimated spread over BBSW, the running yield being the income from coupons, the weighted average term being the average time for cashflows to be returned, and the modified duration representing the sensitivity to interest rates.

The Conservative AUD investment grade (IG) portfolio

This portfolio has 13 securities (please see the link below) with all weightings per bond between 4.9% and 9.6%, yielding 4.37%pa.

The security mix fits with our suggested bands of between 20% and 50% weighting for fixed rate bonds, 25% and 50% for floating rate bonds, and between 15% and 35% for inflation linked bonds.

We have traditionally had a larger allocation to inflation linked securities, but the decreased allocation results from a reduction in supply of inflation linked securities, and recognition of the correlation between floating rate and inflation linked bonds.

All of the securities have an IG rating from one of the major ratings agencies.  

More than three quarters of the portfolio is in senior debt and a little more than half (54%) of the bonds are related to infrastructure.

The largest weighting is the Sydney Airports 2030 inflation linked security and the smallest weighting is the MPC (Melbourne Convention Centre) December 2025 indexed annuity bond.

The Balanced AUD portfolio (investment grade and sub investment grade)

This portfolio has 24 securities (please see the link below) with weightings per bond between 1.9% and 7.7%, yielding 5.49%pa.

The security mix still fits with our suggested security mix bands above, with 46% fixed rate bonds, 34% floating rate notes and 20% inflation linked bonds.

All of the sub IG bonds have an Outperform or Market perform recommendation by FIIG Research except for Maurice Blackburn, which as a recently issued bond, does not have a Research update post the new issue.

The portfolio has a 74% allocation to senior debt, a 41% allocation to infrastructure, a 25% allocation to Other Corporate, and a 7% allocation to Residential Mortgaged Backed Securities (RMBS).  This again fits with our overweight position in infrastructure.

The largest weighting bond again is the Sydney Airport 2030 inflation linked security and the smallest weighting is NRW’s bond, maturing in 20201.

The High Yield portfolio, including foreign currency bonds

This portfolio has 22 securities (please see the link below) with weightings per bond between 1.5% and 16.8%, yielding 6.55%pa.

The security mix is greatly skewed towards fixed rate bonds, partly because almost all our available foreign currency bonds are fixed rate, and because we’ve chosen to overlook the inflation linked securities in pursuit of yield.

As with the mixed Australian portfolio, the sub IG Australian bonds all have an Outperform or Marketperform recommendation by FIIG Research except for Maurice Blackburn.

The USD bonds are chosen for relative value or are names we believe will be relatively stable credit wise.

The portfolio has an 83% allocation to senior debt, a broader allocation across sectors with 19% Resources, 25% Other Corporate and 25% Infrastructure. Currency wise the split is 55% in USD, and 45% in AUD.  The largest weighting is to Adani Abbot Point Terminal (AAPT) and the smallest weighting is to WA Stockwell. The NCIG and AAPT bonds have minimum size restrictions which partly account for the weightings.

Adani Abbott Point Terminal is an investment grade USD bond requiring a USD200,000 face value minimum investment. The bond has a little more than four years until maturity, is senior secured and yields over 7.00% p.a.  We consider AAPT as essential infrastructure in the delivery chain of some of Queensland’s coal reserves and are comfortable with the overweight allocation.

Conclusion

The intention of the three portfolios is to provide new and existing customers with suggested names and yields associated with differing levels of  risk.

Please click on the links below to view the individual portfolios and ask your relationship manager or ourselves in Strategy (ISG@fiig.com.au) if you have any questions on the portfolios and their composition. 

Conservative View

Mixed Balanced View

Higher Yield View

 

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