Well November just delivered the best month for equity markets since the 1960s… Virus? What virus? Ask all those in lockdown in the US and Europe if they feel the best they have since the 60s…
Expectations for several workable, efficacious vaccines are driving sentiment – at least that can be the only way to look at markets it seems at the moment, as nothing else makes sense.
Bond investors are rushing to lock in any kind of yield, as we have seen with the huge oversubscriptions in primary deals recently.
FIIG reopened the unrated market for 2020 with a new deal for Evolve Education which was well taken up and is due to settle tomorrow. Other high yield deals are on foot as you read this, and earlier this week we had investment grade deals from Ampol and AMP Life which were both >3x oversubscribed.
We include all these new issues in the portfolios this month as they represented such good value and we think will perform well for investors.
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.05% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
As mentioned above, primary this month showed a lot of value, so we removed the LendLease bond included at primary last month as it has rallied in price significantly, as well as the AusNet floating rate note from late September.
We added in their place the two new issues from Ampol and AMP Life, both investment grade, floating rate subordinated notes which showed excellent relative value.
This added back the overweight to floating rates, but we go where value is to be found and with market BBSW rates at or very close to a floor we see little risk in floating rates moving materially lower from here.
We also swapped out the Liberty 2018-1 D RMBS for a similar REDS 2019-1 D, choosing to extend the weighted average life to pick up a little extra margin for a slightly better credit risk, the REDS being prime bank (Bank of Queensland) originated mortgages. This generated marginal gains but this small optimisation is what active management of bond portfolios is all about, particularly with the outright level in rates low as it is.
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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 4.00% and is an approximate $600k spend.
We swapped the LendLease, AusNet and Liberty 2018-1 D for Ampol, AMP Life and the REDS 2019-1 D as above, and also the Ford 2023 for the new unrated Evolve Education 2025 issuance scheduled to settle tomorrow.
Evolve is senior secured and is being used to repay existing bank debt as well as providing funds for growth based on the very successful G8 Education childcare centre roll-up model previously run by this same management team and funded in the bond market by FIIG.
The difference this time is the existing business is solid and less of a start-up, and investors are being well rewarded for providing flexibility to the company that the current bank debt will not, to allow it to progress its growth plans in Australia.
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 16 bonds, yields 6.22% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
As mentioned last month, we removed the USD discos this month as they have showed continued price appreciation and now are over our estimate of fair value for the risk of not being called.
We replaced them with two more standard bonds from issuers we like – IAMGOLD’s new 2028 maturity and a new bond from Diversified Healthcare Trust, which owns and operates healthcare properties in the US.
These two bonds will improve the headline yield markedly from the low yield of the discos and brings more assurance back to the maturity profile of the portfolio, with both being senior bonds with a defined maturity date.
We also replaced the Centuria bond with the new Evolve bond. Centuria was due to mature in April 2021 and so offered us very little, and indeed yesterday the company launched an exchange offer for the bonds to extend maturity in a new, lower coupon bond.
Finally, we removed completely the Maurice Blackburn 2022 bond. With the strong price performance through the COVID disruption and short dated maturity with early call dates coming up soon, the yield to these possible calls lessen its contribution to the portfolio to a level where we would rather own other bonds such as Evolve.
Other USD bonds we like:
The table below continues to show other USD bonds we like that don’t fit the parameters of this particular portfolio.