Volatility returned to markets at the start of the month, led by a weak US jobs report and the Bank of Japan raising rates by a whole 0.25% - but for the first time in ~20 years. The Nikkei (Japanese stock market) was down and then up 10-12% across 2-3 days.
The US Fed is basically locked in to begin its easing cycle in September after comments from Chair Powell at the Jackson Hole meeting of central bankers. Things usually get interesting after the first cuts come through – will this time be different? The RBA are all on their own…
Typically, when large companies complete their reporting to the stock exchange, they are then free to issue bonds as the latest information is public and investors have it to hand when deciding whether to invest or not.
We saw this occur in August as Transurban, BNP, Lloyds Bank, BP and Macquarie were amongst those who issued bonds in the month.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.35% and consists of ten bonds of roughly equal weight by value to total an approximate $470k spend.
As a reminder, the portfolio contains a government and semi government bond with low yields. These are not expected to be held to maturity, but instead traded if and when yields fall. Therefore, the portfolio yield is understated compared to expectations given it is unlikely this low yield to maturity will be realised on these bonds.
Additionally, the inflation linked bonds have an assumed 2.5% inflation rate in their yields. With inflation having been high and now stubbornly refusing to come down, these bonds may also return more than currently forecast.
As capital prices of the bonds have moved, we rebalanced the face values of each bond to bring them back as close to 10% weightings as possible given minimum parcel size restrictions.
With all the new issuance in the month, the hard part was which bonds to include in the portfolio. Spreads have tightened, and so with the new BNP floating rate bond issuing at +215, it is wider than the Santander bond we included as new last month. We swapped these.
The new Lloyds and Macquarie subordinated bonds were both 5-year tenors to the first call. Whilst they offered a yield pick up over the longer bonds already in the portfolio, we decided that we would prefer to keep the longer duration assets in expectation of further yield falls rather than chase an extra 0.02% yield for the portfolio.
With the other new bonds lower yielding than the existing ones, we decided not to include any of them, so ended up with just the one change.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while 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 27% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 6.30% and is an approximate $610k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
Last month we detailed how this portfolio didn’t accept the Santander bond as it didn’t hold the bond we switched out for it. This means the same for this month in that we don’t have a target for the new BNP bond, so it also isn’t included.
There hasn’t been any high yield issuance for a while, so that portion of the portfolio also remains unchanged. Hopefully we see some new high yield bonds in the next couple of months so we can re-evaluate the portfolio and add some good risk adjusted yield.
Emeco has recovered in price form when we brought it in last month and as such isn’t really delivering the higher yield we want from a BB rated bond. We will look to switch this out if better value bonds do come along.
High-Yield portfolio:
The High Yield portfolio looks to generate a higher 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 8.12% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
There was a new RMBS issue in the month that we participated in - the Resimac 2024-2 deal – so we bring in the BB rated E notes from that transaction.
We have also begun trading a Ba1/BB- hybrid in GBP from Barclays, the UK-based bank, which has an attractive yield around 7.65%.
We add this new bond to the portfolio this month to further bring the portfolio size back towards our $500k target level and further improve diversification.
As above we will keep our eye on the Emeco yield and look to replace it when a higher yielding, better value bond comes along.
To view and download our Sample Portfolios, please click here.