Despite yields repricing lower following dovish messaging from the Reserve Bank of Australia (RBA), the Sample Retail Portfolio still achieves a yield above 6.00%. Here we discuss the changes made to the Sample Retail Portfolio for the month of March.
Retail Update
What a difference a month can make in financial markets! It was only in February’s edition we were writing about a hawkish RBA, while recent comments from the central bank have been perceived as dovish.
While the RBA increased rates by 25 basis points (bp) at its recent meeting it was the changes to the accompanying statement from last month that indicated a slowing in the pace of hikes.
As a result, the terminal rate has repriced down about 15bp to 4%, implying less than two further 25bp hikes. Despite yields moving tighter the Sample Retail Portfolio still provides a return above 6.00%. It’s worth noting the portfolio has a 95%
allocation to investment grade bonds.
Over the month the below additional bond was added to the retail product offering:
- Aroundtown-4.50%-14May25 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 14 bonds, which provides better diversification.
The current portfolio yields an indicative 6.02%* to the assumed maturity dates and is an approximate $214k spend.
With the outlook for interest rates remaining uncertain, we favour a staggered maturity profile in portfolios, offering increased diversification. In the investment grade fixed rate space our portfolio is skewed to longer dated maturities (including Brisbane Airport 2030, Pacific National 2031, Lendlease 2031 and Qantas 2030), to counter this we have added the newly retail available Aroundtown 2025.
Also noting with interest rates expected to be higher in the short-term, 2-year base rates are elevated offering additional returns compared to some longer tenors. At a 2025 maturity, the Aroundtown captures this, offering an indicative yield to maturity of about 6.41%. Not bad at all for an investment grade credit rating that also pays a 4.50% fixed coupon.
To make room for this allocation in the portfolio, we’ve reduced our exposure to Pacific National 2031, another way to balance out our maturity profile in the portfolio. In doing so our overall return has remained the same, but the portfolio’s duration has decreased.
Remembering duration shows the change in the value of a portfolio in response to a change in interest rates. It’s expressed as a percentage, with a higher number indicating the portfolio is more sensitive to interest rate moves.
While we see opportunity to lock in higher returns in longer dated bonds with increased yields, which we talk to at length in our recent Trading Outlook piece (which can be read here), we also see benefits to adding a variety of maturity dates. No matter what the interest rate movements, it provides a better constructed portfolio and a more resilient one at that.
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.