Wednesday 12 June 2019 by Jonathan Sheridan Sales commentary

Model portfolios – providing a framework and a benchmark

Many financial advisors and institutions provide model portfolios.  FIIG is no different.

FIIG Sample Portfolios

They are useful to existing and prospective clients as they demonstrate how the thinking of the particular organisation is applied in real life situations, and can also provide a valuable indication of how successful the organisation has been in delivering on the mandates it runs.

Returns are clearly not all of the story here.  A feature of the Australian investing landscape, given the extraordinary economic run of success we have had, is that risk is not often mentioned, and yet returns are put on a pedestal.  Being fixed income specialists, return of capital, and therefore managing risk, is at the forefront of everything we do.

Managing risk is hugely important, as any professional fund manager will tell you that avoiding the downside is more important than being the best on the upside.  After all, a 50% loss requires a 100% gain to bring you back to an even keel.  Not losing capital helps compounding much more than a great recovery.

The long term performance of bonds during this expansion might surprise you:
Wire Model Porfolio Graph 12 June

The higher volatility of the share market, and the lower returns of cash, show that bonds should occupy a central position in investment portfolios, and yet the ATO tells us that they make up just 1% of SMSF portfolios, while cash and term deposits make up approximately 26%.

The above shows the whole of the bond market, which is a majority of government, state and territory issuers.

Our current model portfolios, which can be found here, show how we apply our expertise to the opportunities available in the market, and don’t just blindly accept the market return.

We also look very carefully at risk, and so we have developed three portfolios, which have different risk characteristics.  These can be broadly summarised as:

Conservative
Low risk, all AUD investment grade bonds
Current yield to maturity1 3.79%. Returns since inception (29th June 2018) 8.01%

Balanced
Low to medium risk, all AUD bonds, mix of investment grade [45.4%] and sub investment grade/unrated [54.6%]
Current yield to maturity1 5.22%. Returns since inception (29th June 2018) 8.43%

High Yield 
Medium to higher risk, mainly sub investment grade/unrated bonds [59.8%] and selected investment grade bonds [40.2%], with a mixture of AUD [35.3%] and USD [64.7%]
Current yield to maturity1 6.85%. Returns since inception (29th June 2018) 10.55%

Unlike fund managers, we show every holding in the portfolio.  This transparency is a key attribute of owning bonds directly rather than through a fund structure.  This enables investors to have a clear sight into the risk being taken in the portfolios, through credit, interest rate and currency risks.

All parts of the market are considered, not excluding anything simply because it doesn’t fit a mandate.  For example, the high yield portfolio contains approx. 40% investment grade bonds (which would be traditionally excluded from most high yield mandates), as we believe there is opportunity there in rotating capital through new issues that come to market, as well as benefitting from taking high grade, longer duration bonds when interest rates are falling as they are now.

These model portfolios are available for intermediaries such as financial planners or direct investors to consider and invest in.  Instructions are required at each trade as this is not a managed solution.  For information on our managed product, MIPS, please see here.

Otherwise, we would love to hear from you if you would like more information about how we construct, maintain and manage these model portfolios and if we can help you use them as a base for your own bond investments.

 

 

 

1 Yield to maturity is quoted at prices as at the 31st of May.  This includes the total return expected if all capital is returned on the due dates.  Returns since inception may differ due to market price movements and trading of bonds prior to maturity.

 

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