In this article I profile three clients while protecting their identities, which I hope you can appreciate. These clients have invested in our Managed Income Portfolio Service, opting to customise a strategy to suit their own purpose which our Portfolio Manager Kieran Quaine and his team must follow
One of my favourite TV shows is Australian Story. It is inspirational, fascinating and sometimes sad, amongst a whole host of other emotions. It’s the openness and insight into other’s lives that is part of the reason I tune in. The guests share their stories and hope to have some kind of impact on others.
In the past, I’ve profiled individual investors, so others can gain an understanding of the process and outcomes of investing in bonds, which clients seem to like. However, I haven’t had any success getting some of our larger organisational clients to talk about their bond investments. They seem hesitant, perhaps worried that they might reveal their strategies to competitors. Never-the-less an appreciation of what they are trying to achieve and their strategies may be helpful to other institutions and even individuals who are thinking about their own portfolio strategy.
In this article I profile three clients while protecting their identities, which I hope you can appreciate. These clients have invested in our Managed Income Portfolio Service, opting to customise a strategy to suit their own purpose which our Portfolio Manager Kieran Quaine and his team must follow.
The mandates specify what Kieran and the team can invest in and the limits to which they must adhere. He absolutely cannot breach the mandate and there are checks and balances in the system to make sure he doesn’t.
None of the portfolio allocations is right or wrong but pertains to each client’s own strategies. The minimum investment for a customised portfolio is $5 million but there are four set mandates which start at minimum $250,000 investment.
Client number 1 - A conservative low risk portfolio
This client is a not for profit organisation that receives funding from the government and donations from the public. One of its main goals is to preserve capital and it recognises that to do this it must invest in low risk investments in line with its long standing conservative reputation.
Many of its objectives are the same as investors who settle in cash – they want capital stable, low risk liquid investments – but aim for better returns than a cash account or short term deposits.
Its mandate specifies that the investments must all be investment grade and that the company’s credit rating must be at least Standard and Poor’s A+/ Moody’s A1. Ratings of individual bonds can be lower as long as they remain investment grade, allowing Kieran to invest in bank subordinated debt if he thinks the bonds are good relative value.
The very high credit rating limits the choices available. The entire portfolio, of over 20 bonds, are all issued by major Australian banks.
Other allocation requirements include:
- Big four bank issuers only
- Senior debt up to 100%
- Subordinated debt and hybrids up to a maximum 60%
- Can include term deposits up to 100%
Client number 2 - A diversified investment grade portfolio
This client is a school with a medium term view, looking to improve returns over term deposits to help meet the budget for a planned, new state of the art science hub. The school bursar has traditionally invested on behalf of the board, making recommendations and allocating a high 75% to term deposits. But the returns are so low and they need as much income as possible to assist with the build.
After the board approved a mandate for bonds, they decided to alleviate some of the pressure on the busy bursar, and chose the Managed Investment Portfolio Service over a direct portfolio. They like the fact the Portfolio Manager has a total return view and will be trading to help increase returns that can be put back into the new building.
Other allocation requirements include:
Maximum term to maturity of five years Investment grade rated bonds only Minimise duration (exposure to interest rate movements) by predominantly investing in floating rate bonds. Maximum allocation to fixed rate bonds 25% 15% of funds invested in term deposits
Client number 3 – Prepared to take on a small amount of additional risk to boost returns
This client is an ASX listed company and the formulation of its strategy is interesting. Originally they sought a conservative low risk portfolio similar to the first client’s portfolio. But when the returns were discussed, they decided to take on more risk to improve returns.
They want the funds to be available for acquisitions if the opportunity arises. So, liquidity is important, but so is return and if good opportunities exist in the unrated space they’d like the Portfolio Manager to be able to take advantage. Thus its mandate includes a maximum 10% investment in unrated bonds.
The company is less concerned with duration, they have an experienced Chief Financial Officer that understands the market, and has a high degree of certainty that the rated bonds in the portfolio can be readily sold if needed. They have chosen a Managed Portfolio to enable the portfolio manager to identify trading opportunities while the CFO focuses on managing day to day operations and is involved in analysing potential targets or joint venture opportunities.
Summary – What’s common to all three clients?
There are some common themes across all three clients:
- They are looking for higher returns than term deposits. A seemingly small 1% higher return on $5m in one year is $50,000. A substantial sum.
- Liquidity is a concern which they have overcome by tailoring a mandate.
If you are interested in developing a customised mandate please call:
Mark McCudden in NSW on (02) 9697 8728
Bodo Rose in QLD/NT on (07) 3231 6619
Kate Hurse in VIC/SA/TAS on (03) 8668 8834
Darryl Bruce in WA on (08) 9421 8502