The first 2 weeks of the Trump presidency have seen a plethora of announcements. The ones that have affected markets the most have been the tariff announcements, but it seems those applied to notional allies - i.e. Mexico and Canada - have been delayed
after concessions have been negotiated.
Of course this leaves China, which has responded with tariffs of its own. All of this uncertainty about how this will eventually play out, and who is next - surely the EU can't be far away - has introduced some volatility into markets.
Softer than expected quarterly domestic CPI has opened the door for the RBA to begin cutting rates, but with other economic indicators still doing OK, the question is will they walk through it? A cut on the 18th is almost fully priced in at the time of
writing.
With 2 months since the last update, we have a few new bonds to consider for inclusion in the portfolios as well.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.65% and consists of ten bonds of roughly equal weight by value to total an approximate $520k spend.
As a reminder, the portfolio contains a government bond with a low yield. This is 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 usual new bonds drove a change to the portfolio.
Firstly, Ausnet issued a new 5-year callable bond that was very attractively priced. We included it in the portfolio instead of the Hollard Insurance bond as it improved the yield and particularly the sector diversification away from Financials.
This was important as purely on a yield basis we brought the BPCE bond back in despite its high capital price, as a replacement for the EnBW bond, for a yield pickup both to maturity and in income.
This increased the Financials exposure, so it was necessary to reduce it elsewhere. They have similar maturities (2033 vs 2034) so we keep the duration longer.
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 6.37% and is an approximate $620k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
We brought BPCE back into the portfolio for EnBW as above.
Ausnet issued both a fixed rate and floating rate bond, but this portfolio does not hold the Hollard (which was floating), so instead we replaced the BNP bond with the fixed rate Ausnet, to keep the fixed exposure (which we amended last month) and balance
Financials as we did with the Conservative portfolio.
Pioneer redeemed the balance of their outstanding 2026 bonds in December, which will reduce the yield of the portfolio fairly considerably. We include the new Pacific National bond rated BB that we mentioned last month which helps with the yield somewhat
as it yields 6.78%. It priced at 7.75% but has rallied quite a lot since.
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 17 bonds, yields 7.26% and is an approximate $540k spend, demonstrating the concept of greater diversity in higher risk positions.
We include the new Pacific National bond as above as it has now issued, and the Pioneer bond has been redeemed.
The Liberty 2022-2 E bond has been upgraded multiple times since issue and now sits at Baa2 (BBB equivalent) and yields less than 5%. That’s not enough so we have removed it.
We include a new USD bond from French-based reinsurance company SCOR, which despite its investment grade ratings has an attractive yield over 7%.
SCOR had a relatively weak result last year due to a recalibration of the actuarial models underlying its revenue recognition and provisioning, but as this one-off is now complete we believe the company is positioned for a rebound and given the value
on offer for the ratings we have brought it into the available menu.
To view and download our Sample Portfolios, please click here.