Tuesday 12 December 2017 by Jonathan Sheridan Trade opportunities

Jon Sheridan’s $1 million portfolio

Three months ago, Jon suggested a diversified $1m portfolio. Find out how it’s performed and the trades he has made over the last month

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Update

So far the portfolio has delivered an IRR of 5.47%.

Last month, we outlined that Newcastle Coal Investment Group’s price had rallied USD9. After realising a holding period return of 14.09%, the position in the bond was exited and proceeds were used to further diversify the portfolio, while maintaining exposure to USD high yield corporate bonds.

We added more small USD20,000 positions in a spread of USD high yielding bonds.

Australian mining services company Barminco’s 6.625% May 2022 secured bond, offshore oil rig operator Noble’s 7.75% Jan 2024, US retailer JC Penney’s 5.875% 2023 secured bond were new positions, and given the great diversifier for Australian holdings that is Avon, we added a further USD20,000 to this position at a lower price than we initially entered.

Barminco are exposed mainly to gold and nickel mining, predominantly in Australia.  We view this as lower risk than the B rating implies and as such see it as good value.  Noble (B rated) is a smaller Transocean, and although this increases exposure to the offshore oil drilling sector we like the relative value, yielding nearly 2.5% more than its big RIG brother. JC Penney (BB-) is an iconic US retailer but has responded well to the Amazon threat in this sector and 3Q earnings beat expectations.

With the remaining cash we brought the USD back to AUD, realising a currency gain of 3.2% in addition to the bond price rally.  We used the proceeds to secure a minimum allocation of AUD50,000 in the unrated Merredin primary issue at 7.5%, selling our Dicker Data position to make up the $10,000 shortfall.  This is an overweight position and we intend to reduce this holding when an attractive exit price or alternative investment presents itself.

We are left with approximately AUD5,000 in cash which we will keep for a rainy day….

Duration risk was one of the key negatives with the Frontier 2025 maturity bond, so given the July 2021 bond trades at nearly the same yield, the loss was taken and USD20,000 was allocated to this shorter dated 2021 note.  Frontier is a higher risk bond and is rated single B.  Reducing the term to maturity reduces duration risk, while maintaining a very high yield of over 15%.

The portfolio was constructed to have various parts perform in different ways depending on market conditions and the economic climate. It is reassuring to see that portfolio has been performing strongly, as investors chase higher yields in an historically low interest rate environment. While some bonds have retreated in price, this has been offset by increases in other bonds – indicating the importance of diversification when constructing your portfolio.

The yield to maturity of the portfolio has decreased to 4.56% from 4.97% with the sale of NCIG, and running yield has declined by circa 50bps from 5.68% to 5.15%. There has also been a decrease in weighted average term to maturity from 9.5 years to 8.59 years, with the interest rate sensitivity (duration) decreasing to 4.13 years.


Source: FIIG Securities
Yields accurate as at 8 December 2017 but subject to change

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