September finally saw some volatility return to equity markets with tech stocks in particular giving back some of their spectacular 2020 gains. Bond market volatility, as measured by the MOVE index (the equivalent of the VIX for S&P500 stocks) ended the month at a record low, as US10 year yields have been anchored around the low 60bps area for what seems like forever.
There has been more new issuance, dominated locally by infrastructure players, such as the Charter Hall Telephone Exchange REIT, and in particular the energy space, with Transgrid and AusNet both coming to market (following AusGrid in August) with a range of issues, differentiated by security, tenor and capital structure, showing how diverse the bond market can be in providing opportunities for investors.
Despite all the options available, the sample portfolios remained remarkably constant. With yields as low as they are, when a bond comes to market that is cheap compared to the rest, it is likely to stay a favourite for a while, until a similarly rare offering comes along to displace it.
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.26% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
As mentioned above, there wasn’t much opportunity for changing the portfolio given there wasn’t a really compelling alternative issued in the month that looked better value than the bonds we already have in the portfolio.
AusNet’s 2025 callable corporate hybrid was the only one that passed muster, and we swapped out the PHF 2029 index linked annuity bond for it. We want to have annuity exposure in the portfolio, in particular for their unique protection against deflation (which we saw with last quarter’s CPI print), but given there is the JEM NSW Schools 2035 also in the portfolio, with the shorter maturity of the PHF in 2029 we felt the AusNet hybrid offered a better yield-for-risk option for the portfolio as a whole.
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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 24% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 4.12% and is an approximate $600k spend.
We swapped the PHF IAB for AusNet as above, but otherwise the portfolio stayed the same as the prior month.
We continue to prefer credits with higher risk to have a relatively low exposure to the COVID impact, and as such the higher risk portion of the portfolio is unchanged.
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 17 bonds, yields 5.95% (not including the disco yield to call – this increases to 8.43% if they are called as anticipated) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
There were no changes to the portfolio this month. There were three new bonds issued in USD in September that we liked, but unfortunately none met the parameters of the portfolio. They were two corporate hybrids from Scentre Group, following our theme of moving down the capital structure to increase yield while attempting to minimise risk (see
here), and the new bond from the refinance of the Barminco 2022 notes, the Perenti 6.50% 2025.
Instead we include them in the table below along with the other bonds from last month. At the moment there are a lot of bonds that we like that don’t fit the parameters of this portfolio, but we thought it was important to make clients aware of them as they do have a place in portfolios.
Other USD bonds we like: