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SET, FORGET AND REALLY ENJOY LIFE WITH 6.25%pa^

ON INVESTMENT GRADE BONDS

The Wholesale Investment Grade Portfolio

6.25% + PA^

Yield to Maturity
(calculated based on Ask pricing with 75c of brokerage applied)

This Wholesale Investment Grade Model portfolio has 10 AUD-denominated securities with equal weightings of 10% (in face value terms). It assumes an investment of A$500k face value. If investors would like access to the underlying securities, then please talk to an IAM Sales Representative.

The portfolio will invest in a range of liquid, investment grade fixed and floating rate corporate bonds. The portfolio is for investors who are looking to manage risk and earn higher than average yield, while striking the right balance between fixed and floating rate securities in the current interest rate environment. The portfolio will aim to outperform the AusBond Composite Credit Index (BACR0) over the medium to long term.

Coupon Type

FIXED

FLOATING

Bond Maturity

1 - 3 YEARS

3 - 5 YEARS

5+ YEARS

Sector

ENERGY

FINANCIAL

INDUSTRIAL

CONSUMER CYCLICAL

Market Update

Incoming economic data over January further reinforced peak cash rate sentiment; inflation continues to show signs of moderation and retail sales were subdued for the month of December. Both equity and credit markets performed well, continuing the rally that began in November 2023.
Australian government bond yields remain elevated, with 10-year rates rangebound between 3.95% and 4.01% throughout January. The Australian dollar came under pressure due to a combination of a less dovish tone from the Federal Reserve and weakening conditions out of the Chinese property sector.
In the US, there’d been murmurs of as many as five rate cuts throughout 2024. However, forecasts are now suggesting a slower pace of easing, and so throughout the latter part of January, yields bucked their downward trend, with markets eagerly awaiting a clear direction on what comes next.

Portfolio Update – January 2024

Projected Cash Flows

The projected cash flows (2 year forward) is the forecasted income investors would receive from investing A$500k face value in the Wholesale Investment Grade Model Portfolio.

Cash flows are calculated based on next call for principal cash flow figures with the following applying:

  • Cash flows for fixed rate bonds are set out and paid in accordance with the disclosure documents for the bonds;
  • Cash flows for floating rate bonds assume a future rate of underlying index 3m BBSW for all coupon refixes.

Performance

Monthly Performance (as of January 2024) 1M 3M 6M 1YR
ASX200 Index (AS51) 1.18% 13.26% 3.65% 2.73%
AusBond Composite Index (BACMO) 0.21% 5.96% 3.17% 2.45%
AusBond Credit FRN Index (BAFRN0) 0.44% 1.41% 2.64% 5.08%
AusBond Credit Index (BACRO) 0.41% 4.41% 4.02% 4.97%
Investment Grade Model Portfolio 0.72% 6.27% 6.66% 9.96%

*Note: Inception of the wholesale investment grade model portfolio was 1 September 2022. Performance is measured as a total return. Click here for more information on the above indices.

Portfolio Index
Interest Rate Duration (Years) 3.67 3.11
Average Life (Years) 5.80 3.54
Credit Duration (Years) 4.62 3.11
Yield to Maturity 6.25%** 4.87%
Average Rating* BBB+ A+

*Average Rating is based on a linear basis.
**Yield to maturity is calculated based on Ask pricing with 75c of brokerage applied

Portfolio Commentary

At today’s prevailing yields, IAM views medium-term duration positioning within Australian investment grade as most appealing given the shape of the yield curve and our economic and interest rate outlook. While in the Model Portfolio, there is a permitted maximum weighted average modified duration of 4 years, the portfolio currently has a duration of 3.67 years reflecting an overweight towards fixed rate over floating rate securities.
Currently, there are many high-quality corporate bonds at between 6-7% yield within the Australian BBB corporate credit curve, with sound corporate fundamentals. There is also a large cost to move up the corporate credit curve (improving quality), from BBB to A or AA rated securities. This is because the spread per unit of credit risk is optimised at the BBB level based on historical default rates.

As yields rallied for most of January on the back of improved sentiments, the model portfolio posted 72bps of returns with no relative value switches. Strongest contributor to performance was Liberty FRN 3.80% 2028 due price gains. This was followed by Hollard Wholesale Subordinated Notes 3.60% 2039 which was a recent relative trade from December 2023 that replaced a lower yielding issue by QBE.
January 2024 as the first month of the year was marked as a seasonally quieter month with most of new issuances in senior unsecured debt. ANZ was the only major bank to issue subordinated debt, pricing the floating rate tranche at 195bps margin over BBSW3M (6.3% coupon) at issue and the fixed rate tranche at 5.89%. The model portfolio did not switch into these new issues as existing Financial names stood out more. Portfolio allocation to Financials was also optimised in terms of diversification, alike to the rest of the sectors.