This investment grade model portfolio has 10 securities with equal weightings of 10%, yielding over 7% pa^. The portfolio is built with Investment Grade Bonds and is for investors who are looking to manage risk and earn higher than average yield.
|Issuer||Fund Holding||Yield||Type||Maturity / Call Date#||Equivalent Rating*||Research|
|Liberty Financial||$50,000||7.96%||Floating||05/04/2027||BBB-||Click here|
|Lend Lease Finance||$50,000||7.58%||Fixed||31/12/2030||BBB-||hide|
|Origin Energy Finance||$50,000||6.09%||Fixed||11/08/2027||BBB||hide|
|Macquarie Bank||$50,000||6.47%||Fixed||07/06/2027||BBB||Click here|
|Aurizon Finance||$50,000||7.06%||Fixed||09/12/2027||BBB+||Click here|
Click here to view Pricing and Coupon for each bond
The Floating Rate Notes Yield to Maturity is using trading margin + swap to the call/maturity date.
*S&P ratings. Where not available, Moody’s ratings displayed.
^ Prices/yields as at 30 December 2022
Please find the December update for IAM’s Wholesale Balanced Model Portfolio. The portfolio continues to assume investment across 10 securities with equal weightings of 10% and is yielding over 7% pa. It is built with Investment Grade Bonds and was constructed with the dual aim 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 is concentrated around the 3-5 years maturity where we believe relative value and yield is optimised. Given global growth dynamics, the portfolio is also 100% investment-grade over high-yield. We continue to monitor the relative value of high-yield compared to investment-grade bonds and will look for opportunities when they present themselves.
Typically, financials have been larger issuers in the Australian bond market and so correspondingly comprise 60% of the portfolio. Currently, the portfolio has 60% of its exposure in fixed rate bonds and 40% in floating rate bonds. We are comfortable with this fixed/floating dynamic, especially as most of the fixed exposure is in the 3-5 year (or shorter) part of the curve. Longer dated bonds only comprise 30% of the portfolio.
Prices/yields as at 30/12/2022.
Portfolio Update – December 2022
Projected Cash Flows
The projected cash flows (2 year forward) is the forecasted income investors would receive from investing $500k in the Investment Grade Model Portfolio.
The principal cash flow for the Investment Grade Model Portfolio is zero as there are no bonds maturing over next 2 years. The cumulative cash flow is all derived from coupons/distributions.
Cash flows are worked out based on next call for principal cash flow.
Cash flows for fixed rate bonds are set. Cash flows for floating rate bonds assume a future rate of underlying index BBSW3M for all coupon refixes.
|Monthly Performance (as of 30 December 2022)|
|AusBond Composite Index||-2.33%|
|AusBond Composite Credit Index||-0.83%|
|Investment Grade Model Portfolio||
|AusBond FRN Index||+0.31%|
December was once again in 2022 a weak month for equity and fixed income bonds alike, while floating rate counterparts finished the year slightly stronger. In a generally weak month for financial markets, the AT1 universe continued its recent trend of defying gravity, up around 2% in December 2022. The BNP 4.5% perpetual bonds held in the model portfolio were up 3% helping to offset the negative performance in fixed-rate lines such as the Lendlease 2031s and Aurizon 2028s. Higher credit quality and shorter-dated bonds saw less repricing over the month.
Positively, the model portfolio was somewhat insulated by the Ampol, Suncorp and Liberty floating-rate lines.
Performance is measured as a total return.
At its December meeting, the RBA lifted the cash rate a further 25bps, bringing Australia’s cash rate to 3.10%. The US Federal Reserve, meeting a week later, continued its aggressive attack on soaring inflation, raising rates by 50bps, to take rates to their highest level in 15 years. The Bank of England followed suit, raising their base rate 50bps also.
CPI data in January will be critical in determining the next moves for all central banks.
US Treasuries rose through December starting out at 3.53% and finishing the calendar year at 3.88%. It is worth noting that yields have subsequently reversed that trend in early January, with sentiment perhaps being that the next CPI print will be below expectations. Looking back over the past three months, we do see a general trend downwards in the long end with the 10yr benchmark starting the last quarter (Oct) at over 4.20%.
Unsurprisingly, Australian Govt yields largely followed the US lead, with our 10yr at 3.65% and tracking a similar trajectory with yields falling early in the new year.
December is typically a quiet month in terms of primary issuances, however Suncorp did come to market with a Senior Unsecured offer, and CBA has followed suit in early January. One assumes that once we have some post-Christmas economic data and bankers are back into the swing of things, we’ll see an active Feb/March.
The current investment-grade model portfolio has 10 bonds, yields over 7%+ pa^ and would require a ~AUD467k outlay to replicate.
During the month, we made no changes to the composition of the portfolio.
We have been carefully adding duration to the portfolio as long dated yields have moved to recent highs. The current income of the portfolio is very strong with little volatility as it is investment-grade concentrated. One change we will complete during January 2023 is to increase the green certification within the portfolio as well as build out a high-grade portfolio.