April has been a relatively calm month across most markets. The inflation narrative continues to take hold with many corporate executives reporting raw material price increases and in turn they are increasing their own prices to compensate, yet official CPI figures continue to be low, which is giving weight to the central bank arguments that low interest rates should remain for an extended period.
Wages are the canary in that particular coalmine, and with a lot of spare capacity in the employment markets we can expect no rise in official rates for some time yet, as the RBA confirmed on Tuesday.
The consolidation in yields has seen the Conservative portfolio just dip below the 3% level, but the other two portfolios still look to offer strong relative value.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 2.95% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
The primary market was a little less active this month although there were a couple of standouts that we found very attractive in AUD and USD.
For this portfolio, being AUD and Investment Grade, we chose the Transurban Queensland 10-year fixed rate bond, which with a 3.25% coupon looked attractive for the quality. We replaced the Westconnex issue from last month for a similar credit (indeed shared ownership) but a small pick-up in yield.
The Lendlease bond which was new last month has performed well since issue, contributing to the lower overall yield of the portfolio, having been issued at 3.70% and now available at 3.23%, which for a green bond still looks good value.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while still 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 24% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 3.69% and is an approximate $600k spend.
We made the changes above to the Investment Grade portion of the portfolio.
Last month we mentioned we liked the BB rated E notes from RMBS transactions.
We are also of the opinion that for wholesale investors, a better risk adjusted return can be gained from these bonds than from the unrated OMNI 2026 bond. As such we replaced the OMNI bond with the Liberty 2021-1 E note as we did in the High Yield portfolio last month.
These two RMBS E notes are unusual in the market as both are available in $25k parcels. The minimum usually required is $50k, so these two allow us greater diversification given the portfolio size.
High Yield portfolio:
The High Yield portfolio looks to generate a high 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 15 bonds, yields 5.24% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
The number of bonds this month has reduced by one, as the Plenary bond has been called at its call price of 103. We therefore remove it from the portfolio until we can allocate to another good value AUD high yield bond.
There has been an interesting development in the USD market in the last couple of days. Newcastle Coal Infrastructure Group (NCIG), the Newcastle coal loader, has priced a new 10-year investment grade (IG) rated bond with a 4.70% coupon. Despite being rated IG, this is a yield much higher than the Diversified Healthcare Trust (DHT) 2028 bond rated BB-.
Even with the rating 4 notches higher than the DHT, the yield on this new bond places it firmly in the high yield category so we include it in the portfolio. We have previously kept the 2027 maturity from this issuer in our “Other USD bonds we like” section due to its IG rating as the yield was not quite enough, but with the tenor extension we now find a place for this credit in the portfolio.
We will continue to monitor the lower yielding USD credits we have in the portfolio with yields only slightly above 4%, such as IAMGOLD, Brookfield Properties and Rockpoint Gas to ensure they still represent value in the market. Currently we have no other bonds we like at equivalent or better yields, so they stay in.
Other USD bonds we like:
The table below continues to show other USD bonds we like that don’t fit the parameters of this particular portfolio.
The NCIG 2027 is now replaced in the portfolio as above by the new 2031 maturity and the CIMIC is just getting too short and the yield is now below 2%, so we remove them from the list.
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