Wednesday 03 June 2020 by Jonathan Sheridan image wire sample ports 020620 Trade opportunities

Sample portfolios update - May 2020

We have updated the sample portfolios for May month end.

As a reminder, given the market volatility and the subsequent lack of price discovery, we have returned to a simpler set of sample portfolios that will provide more clarity for investors.

We will continue to update these portfolios monthly with bonds that are readily available in the market, to give investors a better insight of what may appeal to them and importantly what type of portfolio they would like to build or own themselves.

Conservative portfolio:

This portfolio is all investment grade and all AUD.

The current portfolio yields 3.57% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.

Currently the portfolio is 49% floating rate, which is unusual in a regime of declining interest rates. We believe that with the RBA setting a cap on 3 year rates at 0.25%, there is not much to be gained by owning shorter dated fixed rate paper. Therefore, in searching for value we have been drawn to floating rate bonds, particularly subordinated debt.

From last month’s portfolio we switched the NAB 2026c subordinated bond into the Macquarie 2025c subordinated bond to pick up the extra yield on this new primary issue.

Download the Deloitte Corporate Bond Report

Balanced portfolio:

The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.

It aims to have between 15-20 positions, with the high yielding bonds in smaller parcel sizes (comprising 25% of the total portfolio) to reflect their riskier nature.

The current portfolio has 15 bonds, yields 4.46% and is an approximate $600k spend.

From last month’s portfolio we have switched out of the MPC 2033 inflation linked annuity for the Macquarie subordinated bond, to pick up a better risk/reward balance and to reduce the overweight to longer duration indexed annuity bonds previously held.

We also switched the Incitec Pivot 2026 investment grade rated bond for the Aroundtown 2025 maturity, which is similarly rated and shorter yet has a higher yield.

Finally, we moved out along the maturity curve from the Liberty Finance 2021 to the 2024 floating rate note, to capture extra spread above the relevant benchmark yield, and pick up extra return for a slightly longer exposure to the same credit.

We kept the same sub investment grade/unrated exposures as last month, keeping the risk from the virus impact as low as possible for the riskier exposures.

High Yield portfolio:

The High Yield portfolio looks to generate a high yield while still looking to have a bias towards as low risk positions as possible.

This is achieved by good diversification and attempting to identify fundamentally mispriced bonds.

The current portfolio has 18 bonds, yields 6.54% (not including the disco yield to call) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.

There are 2 investment grade rated bonds in the portfolio – the deeply discounted securities or “discos”. They are low priced subordinated bonds issued by the major banks in the mid 1980’s.

There is a likelihood they will be redeemed early by the banks just prior to or after January 2022 as their regulatory capital treatment changes. If called at these dates, they will yield more than 20% to the call date.

Assuming this yield to call eventuates, the portfolio would yield 7.34%.

From last month we have reduced the exposure to the property sector by removing bonds which we felt were more exposed to risks from the COVID impacts.

We also opted for a gold exposure rather than a coal one, so switched out of the Peabody 2022 for the IAMGOLD 2025.

The portfolios can be viewed here.