The year kicked off with a bang following stronger inflation figures, pushing yields higher. We added new bonds to our retail list and updated our Sample Retail Portfolio, which offers a return of 6.02%. Here we discuss the changes made to the Sample Retail Portfolio for the month of January.
Although the Reserve Bank of Australia (RBA) didn’t hold a January rate decision meeting, fixed income investors still had a bit to digest. Inflation jumped in the December quarter, with the trimmed mean (the RBA’s preferred measure) 20 basis points (bps) above consensus and the RBA’s projections.
Shorter dated yields moved higher following the release as markets repriced for a potential 25bp rate increase at the February meeting (and the possibility of another 25bp at the March meeting).
The move higher in yields has further highlighted the attractive returns on offer, with some of our preferred investment grade bonds yielding 5%-6%. This has helped keep the return on the Sample Retail Portfolio just over 6% to the assumed maturity dates*, added to by the changes we made over the month. Also worth noting is that this is with a 90% allocation to investment grade bonds, providing an attractive risk/reward balance.
Over the month additional bonds were added to the retail product offering to further diversify retail portfolios and improve returns. These include:
- Ampol-BBSW+3.40%-19Mar27c Subordinated unsecured
- AURFIN-3.00%-09Mar28 Senior unsecured
- BENAU-BBSW+1.48%-14Oct26c Subordinated unsecured
- MELBAIR-3.763%-25Nov31 Senior secured
- MyState-BBSW+2.75%-03Nov26c Subordinated unsecured
- Qantas-3.15%-27Sep28 Senior unsecured
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and selective 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. Currently the portfolio holds 13 bonds, which provides better diversification.
The current portfolio yields 6.02% indicatively to the assumed maturity dates* and is an approximate $211k spend.
The newly retail available Ampol 2027c subordinated floating rate notes provided a higher return than the shorter dated 2026c line we held, so we switched our holding to the 2027c notes. The longer dated Ampol notes offered a pick-up in yield of around 40bps indicatively to the call date, while we remained in the same credit.
Similarly, for an extra year until its call date, we preferred the Bendigo and Adelaide Bank 2026c subordinated floating rate notes to the Macquarie 2025c notes for its higher return, so we switched out the latter. The Bendigo and Adelaide Bank notes are currently trading at a discount, providing an attractive entry point and also the possibility for capital gain if held to the call date.
We had flagged last month that we prefer a more even weighting between fixed and floating rate notes, where we had been slightly more exposed to floating rate notes. Even more so with the rate hiking cycle likely coming to an end this year. We topped up our Lendlease 2031 bond by $10k, rounding out our holding to $20k, similar to all other fixed rate allocations in the portfolio and hence balancing out our fixed weighting.
The AMP 2023c subordinated floating rate note is due to be called in November this year and given we typically prefer to actively switch out of ahead of the redemption dates, we continue to look for a suitable alternative to replace this holding with.
With the market currently pricing the RBA to begin cutting rates in early 2024, we intend to take advantage of the higher yields on offer from fixed rate bonds, and higher margin floating rate notes, which will provide security of income if/when yields begin to move lower, illustrating the importance of a well-constructed portfolio.
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 expected yield to the assumed maturity/call dates of the bonds included in the portfolio.