This month the Reserve Bank of Australia (RBA) delivered its fourth consecutive half a per cent rate rise, although the tone could be changing. Yields have crept higher over the month, providing attractive opportunities to further add to portfolios. Here we discuss the changes made to the Sample Retail Portfolio for the month of September.
Retail Update
As widely anticipated, the RBA increased the cash rate to 2.35% at its September meeting, making it the fourth consecutive 50 basis point (bp) rate hike this tightening cycle. However, the commentary from the central bank signalled that although further rate hikes are still likely, they will possibly be in smaller increments going forward.
Yields have drifted higher since early August, with the yield on the 10-year Australian government bond about 40bp in the month. However, following the change in tone from the RBA, there could be a downward trend, as the market reprices for less aggressive rate hikes from here on. This could present an opportunity to lock-in higher returns currently available ahead of any such move.
The return on the Sample Retail Portfolio has benefitted from the move higher in yields, offering a yield to worst of 5.73%, up from August. This is also with a 90% allocation to investment grade bonds, proving the attractive risk/reward that can be achieved.
To further expand the retail product offering, FIIG has made select investment grade USD-denominated bonds available. This is an opportunity for investors holding USD currency looking for suitable investments or where there is a desire to diversify portfolios with an exposure to sectors/issuers etc., available in USD.
Noting that foreign currency bonds are exposed to exchange rate risk, and therefore currency rate fluctuations may affect returns, asset values and price. Please note, FIIG does not provide foreign currency or exchange rate advice.
Over the month, the new retail available bonds included:
- Westpac-5%-21Sept27c AT1 hybrid USD
- NCIG-4.40%-29Sept27c senior secured USD
- BP Capital Markets-4.875%-22Mar30c subordinated unsecured USD
- TransCanada Trust-5.625%-20May25c subordinated unsecured USD
- Santos-3.649%-29Apr31c senior unsecured USD
- Pacific National-3.80%-08Sep31 senior unsecured
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have around 10 positions, with the higher yielding bonds in smaller parcel sizes to reflect their assumed higher risk.
The current portfolio has 13 bonds, yields 5.73% indicatively to worst* and is an approximate $200k spend.
We made only minor changes this month to the portfolio, reflecting the recent updates in prior months and current mix of returns, credit quality and diversification. One of the beauties of bonds is that once a portfolio is well-constructed, it can be left alone until a change is required.
With the Pacific National 2031 bond becoming available to retail, we have added this into the portfolio. It’s the highest yielding of the Pacific National issues and provides an attractive running yield with a 3.80% fixed coupon.
While we have no concerns with the Transurban 2031 credit, to make room for Pacific National’s bond of a similar tenor, we exited this exposure. Noting the higher coupon, the Pacific National bond offers a higher return. Both are also of investment grade credit rating.
With the 3month Bank Bill Swap Rate (BBSW) currently around 2.67% and the coupons on the floating rate notes in the portfolio resetting, the portfolio is able to lock-in a higher level of income for the period. Although noting earlier comments regarding the degree of future rate hikes, we remain comfortable with the current allocation to floating rate notes and would not look to increase this.
We are currently monitoring the situation to make further additions to the portfolio, with supply for some of our preferred names a constraint. With the large volume of issuers redeeming bonds, the market has been awash with cash looking for reinvestment options.
Although we aim to hold around 10 bonds, we currently hold 13, which provides better diversification and allows us to maintain a similar weighting to fixed coupon and floating rate exposures.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
*Please note the indicative yield shown is the minimum expected yield to worst (YTW).