With the market repricing rate hikes following the Reserve Bank of Australia (RBA)’s May meeting, the portfolio now yields over 5.00%* indicatively. Here we provide an update on the Sample Retail Portfolio for the month.
Retail Update
The Reserve Bank of Australia (RBA) was hawkish at its May meeting, hiking rates for the first time since 2010, and revising inflation forecasts higher. Government bond yields marched higher in response, more so in the short end flattening the yield curve.
The market is now pricing in a further 10 rate hikes for the year and expects a return to rate cuts in early 2024.
Although it’s yet to be seen how the current tightening cycle plays out, the regular and stable income a fixed income portfolio provides some certainty in what is an uncertain market.
FIIG expanded its retail product offer to include the household-name Transurban 2031 issue, which pays a fixed 3.25% coupon semi-annually. The beauty of recent rate moves is this investment grade bond now trades at a discount to face value and is available at a yield over 5.30% indicatively.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have around 10 positions, with the high yielding bonds in smaller parcel sizes to reflect their assumed higher risk. However, with only one sub-investment grade allocation currently in the portfolio, it is a larger exposure.
The current portfolio has 12 bonds, yields 5.34% indicatively to worst* and is an approximate $200k spend.
As mentioned above, with Transurban’s 2031 bond being made retail available, we included it in the portfolio for its senior secured position and attractive higher yield. Previously investors would need to reach for yield, now it’s achievable in quality credit exposures.
As per the prior month, we’re happy with the existing positions and in favour of replacing any, we trimmed allocations to add in Transurban.
While rising inflation remains relevant, we trimmed our Sydney Airport 2030 position by $5k as we also hold an allocation of Royal Women’s Hospital inflation-linked bond. These two bonds make up a larger weighting in the portfolio.
We also trimmed our exposure to ClearView’s 2025c notes by $5k, which offers a higher floating rate coupon, however being of sub investment grade rating we prefer to keep these allocations appropriate in size to the overall portfolio.
Although we aim to hold around 10 bonds, the addition of Transurban provides the portfolio with better diversification and allows us to maintain a similar weighting to fixed coupon bonds and floating rate note exposures.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Fact Sheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
*Please note the indicative yield shown is the minimum expected yield to worst (YTW).