Tuesday 28 November 2017 by Guest Contributor Education (basics)

Review your own portfolio in five easy steps

Lately, I’ve been working on portfolio reviews for my clients, focusing on diversification. Throughout the year, there are always interesting opportunities however I think it’s important to regularly review your portfolio and to think about what you want to achieve. Are you looking for capital stability, higher returns or a bit of both? 

steps

​By Danica Warren

When looking through your portfolio, here is a list of what I consider most important. The reporting that FIIG provides for clients through the Portfolio Performance Reports makes it easy to see a snapshot of your portfolio and monitor the aspects you want to watch. These reports can be downloaded from MYFIIG in the documents tab. See the end of the note for sample output. 

1.   Issuer exposure

danica

Being diversified across different issuers can help to protect your portfolio if one of your bonds is going through a hard time. However it is a bit like the Goldie Locks story (you don’t want too many or too little bonds) where is “just right”? Somewhere between 10-20 names is a good number of issuers, most of my clients identify with a strategy of investing greater amounts in investment grade bonds, then for those wanting to add unrated exposure, investing smaller allocations to a wider variety of names. This allows the portfolio to generate higher returns without taking on a proportionally high level of risk.

See Figure 4, column (5) details exposure to each bond.  For example this client will probably look to diversify their Elanor holding being 13.5% of their portfolio over time, but wanted to take advantage of getting into the bond at first issue.

2.   Returns

Looking at the Annualised Returns and the Yield to Maturity (YTM) helps to gauge your overall return since you have held the bond and determine the yield left until the bond matures. If you’ve had a higher than expected annualised return then the YTM from now until maturity will be lower than expected. Some clients have been choosing to take profits and move into other bonds that are going to provide a better yield.

There are obviously other considerations including reinvestment options, and if the new bond will provide simular portfolio exposure. For example, replacing an investment grade bond for an unrated bond would need to be considered carefully.  Another aspect to consider is if there any bonds that have underperformed and the reasons behind the poor performance?  If you are no longer happy with the credit of a company then it’s a good idea to find a substitute bond.

See Figure 4, columns (8) and (9) help determine returns. Keep in mind however, bonds that have been held for less than three months will show inflated returns as they are annualised. 

3.   Bond type

The three types of bonds will perform differently under various market scenarios. Having a range of bonds will help create a portfolio that should provide less volatile returns. Our Portfolio Strategies team recommend a 33.3% allocation split between fixed, floating and inflation linked. However, this is a starting point. If you have a view of the economy we can adjust the allocation. For example if you think interest rates are going up, you can increase the allocation to floating rate notes.

See Figure 3, pie chart (1) outlines the security type – this particular client doesn’t think interest rates are going anywhere for a while and is happy to keep a higher 60% allocation to fixed rate bonds

4.   Maturity profile

Just like a company wouldn’t want to pay back all of its debt at the same time, I think investors shouldn’t want all of their bonds maturing at the same time. So, we aim to try to spread maturity dates over different years. This means you have liquidity at various times in the future should you need the funds, and are less reliant on the secondary market.

Another factor to consider is if you have any bonds due to mature in the next year? We have been asking clients if they want to exit early and avoid the refinancing risk.

See Figure 2 which helps to show if your portfolio is overweight a particular maturity year.

5.   Industry exposure

Just like you don’t want to be overweight to a particular company/issuer, neither do you want to be overweight a particular industry. It is worth checking industry concentration, not just of your fixed income portfolio, but also of your deposits, shares and hybrids. Many Australian investors are overweight banks and financials.

If a particular industry goes through a hard patch, a portfolio diversified by industry won’t take as big of a hit. This is another section that can reflect your views on the market, if you think a particular sector is going to perform well then you can have a higher allocation to that sector.

See Figure 3, pie chart (3) which shows the sector types.

Sample Portfolio Performance Report

Source: FIIG Securities
Figure 1

Maturity Schedule

Source: FIIG Securities
Figure 2

Holdings by

Source: FIIG Securities
Figure 3

Current holdings

Source: FIIG Securities
Figure 4

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