After the recent ‘Three clients, three different mandates’ note, I was sent a long list of questions by an existing DirectBond client. He’s thinking about transferring some of his holdings into MIPS. Here we answer his questions
Our Managed Income Portfolio Service (MIPS) is Australia’s first direct individually managed account (IMA) for bonds. To see our general overview of MIPS, click here.
1. In any one of the four programs, do all members hold the same bonds?
- If yes, then does that preclude the inclusion of certain desirable or attractive bonds, due to inadequate stock available?
- If no, then how does FIIG decide who gets what, and does that not advantage/disadvantage individual members? (Each member in the one program could conceivably achieve quite different results.)
Answer – Clients mainly do hold the same bonds in each of the four programs. However, not always as it depends on how much they invest. Larger investments will hold more bonds. In the Income Plus program, funds are currently spread between 31 bonds for a $500,000 investment.
Members in the same program may achieve different results depending on when they bought into the service.
2. Across the four MIPS programs, is it likely that all FIIG clients, regardless of their chosen program, will have some of the same bonds? That is, will bond X exist in Core Income, and in Income Plus programs?
Answer – While there are common bonds across the programs (if we like a bond then we are likely to hold across multiple programs), there are limits given the various program mandates. For example, the Suncorp subsidiary AAI subordinated bond is held in Conservative Income and Income Plus, but not the Inflation Linked program.
3. What is the historical return for each of the MIPS categories?
Answer – Below is an extract from the end of September quarter report showing returns for the four MIPS options.
Source: MIPS Quarterly Report – September 2016
Note: A link to the full September report is available here.
4. In the case of new issues, do MIPS clients generally participate? How do you allocate the stock available? For example, in the recent Eric Insurance issue of $22 million could only satisfy only 440 clients (MIPS and others).
- If yes, then good, but
- If no, then the MIPS people missed out on a cracker!
Answer – MIPS clients may participate in FIIG originated deals, however it depends on whether the portfolio management team likes the bond. In the case of the Eric Insurance deal, the Income Plus program did participate buying the bond at first issue at $100. Since then the prices have risen and are at $103.10 as at 28 October 2016.
Typically the portfolio manager, Kieran Quaine will invest small amounts in many high yield bonds as diversifying exposure is important to spread the risk.
5. Do any/all of the MIPS programs hold foreign currency bonds?
Answer – Not at the moment, but we are considering them.
6. Do holdings in a given category have the same value (i.e. $50,000 of each bond) or do the amounts vary?
Answer – Although it is possible that individual bond allocations could have similar face values in the portfolio, the allocation per bond is at the discretion of the MIPS team. It is depends on many factors, such as the value of your investment. Further, over time the prices of the bonds will change so will the value held. Please click here to view the current holdings of each of the four mandates.
7. I have an existing DirectBond portfolio; do I have to sell my bonds to then invest in MIPs?
Answer – You can transfer your existing bonds into your Managed Portfolio Account, subject to MIPS approval. MIPS will assess whether your bonds meet the parameters of your selected Investment Program and any bonds that fall outside your selected Investment Program may be replaced with bonds that align with the example portfolios.
8. Do MIPS investors receive contract notes as Kieran and the team buy/sell on their behalf?
Answer – No, MIPS clients will not be sent contract notes. They will be sent to the portfolio manager. However, you will be able to see them on the MyFIIG portal.
9. Do MIPS investors receive coupon advices?
Answer – No, investors will be able to see the up and coming income on MyFIIG. They will also be sent monthly statements. MIPS clients can opt to have income paid to their nominated account as it is paid, or can choose to let it accumulate and be reinvested.
10. Is the funding account the same as we currently use?
Answer – No, we need to set up a new account just for MIPS. The account will have two important purposes: to fund purchases and also for custody of cash holdings. The account needs to be just for MIPS so we can calculate returns on the amount invested.
We also need to make sure funds are available when they are needed for purchases and there aren’t any unexpected payments coming out.
11. Is the monthly statement the same as we get now as an individual client?
Answer – No, see the example below.
First page summary
Subsequent pages, individual bond holding summary
Last summary page shows transactions during the quarter
Fee Summary
There is also another page showing a summary of credit ratings, but as we are unable to show credit ratings to retail clients, have omitted this page of the report.
12. What is the fee for the MIPS service? Does that include the custodial fee?
Answer – MIPS charges a management fee of 0.85% for Income Plus and 0.65% for the three other programs. Custody fees also apply, which decrease based on the size of investment and are a maximum of 0.20%. There is a transaction fee of $20 per trade on MIPS accounts.
The full quarterly report can be viewed here. For more information regarding MIPS, please call state representatives:
Mark McCudden in NSW on (02) 9697 8728
Bodo Rose in QLD/NT on (07) 3231 6619
Kate Hurse in VIC/SA/TAS on (03) 8668 8834
Darryl Bruce in WA on (08) 9421 8502