Wednesday 27 July 2022 by Jessica Rusit Sample-retail-portfolio-update-july-2022 Trade opportunities

Retail sample portfolio update - July 2022

It was an eventful latter-half to FY22, with escalating inflation, a correction across equity markets and major central banks aggressively hiking rates (with even our own Reserve Bank of Australia [RBA] jumping on the bandwagon). It’s timely to take a breather as we see in FY23 and reset portfolios. With that in mind, here we provide an update on the Sample Retail Portfolio for the month.

Retail Update

July kicked off similarly to how June began, with another 50 basis points (bps) increase to interest rates from the RBA. Markets had been anticipating the move, and there was less of a ripple effect across government bond yields. The yield to worst on the Sample Retail Portfolio slightly increased to an attractive 5.91%.

With talk mostly around the outlook for recessions in the US and Australia, we’ve seen a rotation out of equities, evidenced by a drop across indices. While both the US Federal Reserve Chair Powell and RBA Governor Lowe believe a hard landing can be avoided, with households relying on pent-up savings accumulated over COVID-19, investors seem to be preparing portfolios regardless.

There has been a theme over the year, and we expect it to continue, for more defensive allocations in portfolios, with investors favouring investment grade or stronger high yield credit exposures. Overall, a central feature of a well-balanced fixed income portfolio is that it will continue to provide a regular, stable income no matter what.

For added diversity to portfolios, we have expanded the retail product offering to include the below investment grade and high yield bonds.

  • IAG-IAG-BBSW+2.45%-15Dec26c- Tier 2 subordinated floating rate
  • QBE-BBSW+2.75%-25Aug26c- Tier 2 subordinated floating rate
  • Emeco-6.25%-10Jul26- Senior secured fixed coupon
  • NAB-3.225%-18Nov26c 2026c -Tier 2 subordinated floating rate
  • LibertyFin-BBSW+2.55%-25May26- Senior unsecured floating rate
  • Australian Gas Networks-2.82%-28Apr31- Senior secured fixed

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 higher yielding bonds in smaller parcel sizes to reflect their assumed higher risk.

The current portfolio has 13 bonds, yields 5.91% indicatively to worst* and is an approximate $200k spend.

With a number of new bonds being made available to retail investors, we included the Liberty Financial 2026 floating rate note (FRN) and the Emeco 2026 fixed coupon bonds in the portfolio. Both offer attractive returns and a shorter tenor, however each pose a different proposition for the portfolio.

The Liberty 2026 notes are senior unsecured FRNs, whereas most bonds in the FRN space are Tier 2 or subordinated debt exposures. This means the Liberty notes have a hard bullet maturity as opposed to an optional call date in 2026. They also currently offer a forecast return above 6.00% and are investment grade. We removed the Pacific National 2027 FRNs to make room for the Liberty notes, as each have a similar tenor, but a slightly higher return is offered by the latter.

With high yield exposures dwindling in retail portfolios as early redemptions reduce allocations and there being limited reinvestment options, we added the newly available Emeco 2026. This senior-secured position offers a higher return close to 7.00%. Although non-investment grade, the company is run conservatively, including targeting net leverage to remain at or below 1x.

As the Clearview 2025 notes were the only other high yield exposure in the portfolio, we added Emeco without reducing another exposure to round out the high yield allocation and to provide increased diversification.

With rate movements bolstering returns from bond offerings of higher credit quality, we’re reluctant to reduce any of our existing longer dated fixed coupon notes. Should a recession eventuate, these bonds, along with providing a stable regular income, should also see some capital upside.

Although we aim to hold around 10 bonds, we currently hold 13, which provides better diversification and allows us to maintain a similar weighting to fixed coupon and floating rate 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).