Tuesday 17 September 2019 by Jonathan Sheridan Trade opportunities

FIIG model portfolios update – August 2019

August was a relatively quiet month in terms of management of the portfolios.

Model Portfolio August

Yields continued to fall, with the 10-year AUD government bond rate moving from 1.20% at the start of the month to 0.91% at the end, although without the usually associated widening of credit spreads.  This has meant the longer dated credit exposures such as Sydney Airport 2030 and Pacific National 2027 have performed very well.

The other notable market move, relevant to the High Yield portfolio, was that the AUDUSD rate fell again by another 1.6%, which further enhanced valuations of the USD positions.  This of course is a volatile market, and I expect that it will likely trade up and down within a range, while moving slowly lower over time.

The trick will be to attempt to time any potential turnaround in yields or the currency.  Timing is nearly impossible to get right, so I expect over time as opportunities present themselves, to slowly redistribute the weightings of the portfolio towards AUD only and shorter duration assets.

Conservative Portfolio:
With the market moving again in our favour, the return has improved to 8.71% p.a. since inception at 1 July 2018. The forward yield of the portfolio is still relatively strong for the credit quality at 3.29%. No trades were done in the month.  

I considered the new Liberty FRN as it was very good value at a margin of +2.60%, but already having a position in the name in the 2022 FRN I did not want to overweight a low investment grade-rated issuer, and the pick up on the existing bond was not sufficient to incentivise the trade.

Pacific National are in the market discussing a new deal, which I will look at when it comes to market.

Balanced portfolio:
Falling interest rates do not help this portfolio as much as the Conservative, as it has a shorter duration, or sensitivity to rate moves, caused by the larger allocation to shorter-dated, higher yielding bonds. The higher coupons however offset some of this, and continue to offer strong income returns.

The portfolio as a whole moved to an 8.59% p.a. return since inception at 1 July 2018, and also demonstrates a strong forward yield to maturity of 4.62%.

Again no trades were undertaken this month.  The W.A. Stockwell 2021 bond was redeemed early at a premium, and with the capital value in the bond being just over half of the face value due to the prior amortisation, the portfolio did not have enough cash on hand to reinvest at the $50,000 minimum parcel required for the new bond issued a week earlier.

The portfolio is therefore sitting on approximately 5% cash, bolstered by the amortisation payments from the Zenith Energy and Merredin bonds, which will be deployed hopefully into the next new FIIG originated deal when it comes along.

High Yield Portfolio:
As >60% of the portfolio is denominated in USD, the move in the currency benefitted again this month.  The return since inception at 1 July 2018 is a very healthy 12.19% p.a., but as a reflection of the current low yield environment, the forward yield to maturity has slipped below 6%, at 5.95%.

There was also some downside as I decided to exit Dean Foods rather than go through a potentially protracted restructuring process. 

This has been a disappointing holding, starting with such promise just a year ago in the #1 milk products business in the US. It goes to show that high yield investing is not without risk, even in market leading businesses, and disruption can happen very quickly.

It also shows the benefits of diversification, with the overall portfolio only being affected by 1.4% due to the relatively small holding in this individual bond.

I am also following the situations of CF Asia Pacific and Pioneer Credit very closely, as both bonds breached covenants in the month.  Again, both are relatively small holdings in the portfolio at 1.9% each.