Interest rates continued their decline from prior highs, falling approx. 0.20% to the end of January from the end of October.
The AUDUSD exchange rate fell almost another 2c or 3% over the month. It was a pleasant return to the expectations for the portfolios after September and October saw higher rates and a stronger AUD.
It was a quiet period for market new issues over Christmas with market participants usually taking their annual break. As such the earning of coupons becomes the major source of returns, along with the positioning of the portfolios. I expect this to be the likely source of returns for the year ahead, unless the market offers up something cheap.
New issue concessions, particularly from the banks, have tightened considerably over the last year, so finding value in credit spreads has become more difficult in 2019.
Performance: 7.95% p.a. (since inception 29th June 2018)
No new issues were included in the portfolio in December as no value presented itself, so the portfolio continued to collect coupons. As yields continued to gently fall the portfolio overall fell towards 3%, representing the level at which investment grade only portfolios should be expected.
Performance: 7.79% p.a. (since inception 29th June 2018)
The major influence on performance in this period was the purchase of CF Asia Pacific by Anchorage Capital, which left bond holders in the unenviable position of receiving back 61.6c/$ of remaining principal. This negatively affected the portfolio performance by approx. 1%.
The new IMF Bentham issue looked attractive for use of the available cash in the portfolio but I also needed to raise some cash, and Merredin, after its excellent run, was selected as an equivalent, lower risk Unrated bond to sell to fund given the available liquidity opportunity. Merredin returned 9.5% since inception of the portfolio.
High Yield Portfolio:
Performance: 11.66% p.a. (since inception 29th June 2018)
This portfolio also owned CF Asia Pacific - see above.
The positioning, particularly in USD bonds, helped offset this with the favourable currency movement.
The quiet primary issue period did not mean there was nothing to do. Harland Clarke called their March maturity slightly early on the 17th of Jan, realising the expected 6.1% (in USD) at the opening of this position – a rare hold to redemption for this portfolio as I usually prefer to switch when value dissipates, usually happening before maturities.
This topped up the cash balance of the portfolio, after I had sold the Hertz 2022 in early December following strong capital price performance realising 16.2% in USD and 23% in AUD since the inception of the portfolio, I bought both the ANZ and WBC 'discos', using up almost all the cash on hand.
If called in early 2022 these investment grade rated major bank subordinated bonds may return up to 15%, so whilst the headline yield of 2.5% is not “high yield”, the total return in 2 years could well be. The fall in yields globally has really come to the fore in this portfolio, with the headline yield (not assuming the call as above) at 5.33% (6.20% if the discos are called), from well over 6% just a year ago.
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