Tuesday 20 March 2018 by Jonathan Sheridan Trade opportunities

Jon Sheridan’s $1m portfolio – an update

To date, the portfolio has returned an impressive internal rate of return (IRR) of 5.97%

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In our last review of the portfolio, we exited our USD position in Newcastle Coal Investment Group. We capitalised on the USD9 surge in price, crystallising a holding period return of 14.09% and reducing duration risk.

Remembering that modern portfolio theory emphasises the importance of diversification, we entered positions in Barminco, Noble and JC Penney. We exited our position in Frontier’s 2025 bond in favour of the shorter dated Frontier 2021 bond. We maintained our exposure in commodities, oil and gas, retail and telecommunications. Furthermore, we increased our position in Avon by USD20,000 and finally, we kept approximately AUD5,000 in cash.

Since the December update, we have seen the return of volatility, fuelled by stronger than reported inflation data causing markets to react violently in anticipation of rising interest rates. This was exacerbated by new Fed Chairman Jerome Powell’s hawkish testimony to Congress. Interestingly, arranging all the trading days since the turn of the century from lowest volatility to highest (measured by CBOE’s VIX), 80 of the top 100 calmest days were in the last year.

With this in mind, we decided to alter our positions in some of the bonds. We realised an annualised  holding period return of 18.11% (admittedly only in 3 months) in Merredin Energy’s 2022 bond, and redeployed AUD50,380 to CF Asia Pacific’s 2020 bond. The shorter maturity and amortising nature of the CF Asia bond, coupled with a yield to maturity of 8.35%, were compelling reasons to allocate to this bond. Furthermore, our decision was strengthened by the company’s recent restructure to simplify the business and their credit position.

In January, Noble Holdings International Limited’s price increased following its newly issued bond (proceeds were used to tender for existing notes) and we decided to sell. After realising a profit, AUD35,000 was reinvested into pharmaceutical giant Mallinckrodt’s 2022 5.75% bond. Mallinckrodt specialises in autoimmune and rare diseases, with an emphasis on neonatal critical care respiratory therapies. With a BB- rating (S&P) and YTM above 7%, this reallocation offered diversification into the US healthcare sector and reinforced the theme of reducing duration risk.

The portfolio has so far performed exactly the way it was intended to. The broader, global bond market saw yields rise as investors were spooked by fears of rising inflation. Thus the government bond yields rose slightly in the portfolio. However, corporate bonds yields, comprising part benchmark yield plus a credit spread to compensate for additional risk over Commonwealth government bonds, continued to contract, offsetting increases in the benchmark rates. So, overall, movements in corporate bonds were not as dramatic as they could have been. 

To summarise performance, the YTM of the portfolio increased to 4.94% from 4.56% with the sale of Noble and Merredin, and the running yield increased from 5.15% to 5.26%. There has also been  a decrease in weighted average term to maturity from 8.59 years to 8.27 years, with the portfolio interest rate sensitivity (duration) decreasing to 3.63 years.

The opening portfolio value was $1,094,495 and as at 16 March, had a value of $1,094,838. Additionally, the portfolio has generated $36,240 in interest income, $801 of which we have reinvested. 

Please see the updated portfolio below (right click on the image and open in a new tab for full view)

Jon's $1 million portfolio

Jonsportfolio
Source: FIIG Securities
Note: Prices are accurate as of 16 March 2018, subject to change.
For bonds purchased since the prior update, prior YTM is shown at purchase date.


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