Since inception in September 2017, Jon Sheridan’s portfolio has returned an outstanding 6.73%pa. The return is even more impressive when you consider it holds roughly 30% in government bonds
Since the last update as at 31 July, I have made a couple of changes to the portfolio.
Sold Virgin 2023 AUD
I sold the Virgin 2023 AUD bond, which worked out as anticipated when buying it at primary. It was a small issue size and a rare, rated, sub-investment grade bond in the Australian market. For that reason I expected it to rally in price (decline in yield), and it did so, quickly reaching a price of $103 after only four months, when I decided to sell, realising a 17% IRR. In fact I was a bit early, as the price has continued to rally, currently seen at a mid price of around $104.
Bought Virgin USD 2021
However, the switch I made, into the shorter dated USD bond from the same issuer, the 2021 maturity, has also outperformed, as I moved from an AUD exposure into a USD denominated bond, and the currency has sold off, from around 0.725 when I did the trade on the 24 September, to its current level of 0.707. At $103, the AUD bond actually yielded basically the same as the shorter bond (7.3%) from the same issuer. I saw this as a great value play, by reducing my tenor and yet maintaining yield - not often available, particularly in high yield bonds given how sensitive they can be to the longer maturities.
Sold Avon 2022, bought Maurice Blackburn new issue
On the other hand, I actually took the opposite side of that currency move when I sold the Avon 2022 bond at the end of August. I didn’t particularly want to sell this bond specifically, but I did want to invest in the new Maurice Blackburn bond, and I had an overweight $40,000 face value position in the Avon, which actually worked out nicely, as FIIG new issues are an AUD50,000 minimum, so with the currency exchange, I had sufficient funds to do the trade. The MB bond has also performed nicely since issue, rallying about $2.50 in price.
They were the only trades I did in the period, as generally I am happy to hold bonds to maturity. One of the basic principles of this portfolio that I held at inception was to generally take HY exposures in USD, to potentially use the currency as a natural hedge to these higher risk positions. This has borne fruit over the last couple of months in particular, as AUD/USD has sold off, when the USD HY bonds I hold have also seen yields rise and prices fall.
The high income from these bonds also helps cushion the price falls to some extent. I have riskier exposures, in Bristow, Rackspace and JC Penney in particular. However, both Bristow and JC Penney are senior secured, and despite being in industries currently in difficulty, I am happy with where I sit in the capital structure, and so, at the moment a happy holder. If this changes then I would probably look to bring those funds back to AUD to take advantage of the fall in the currency.
The current portfolio (as at 31 October 2018)
Portfolio internal rate of return since inception (Sep 2017): 6.73%pa
Current portfolio yield to maturity: 4.98%pa
Current portfolio running yield: 5.24%pa
Note: Prices are accurate as of 31 October 2018, subject to change.
Future possible switch
I am also keeping my eye on the Pacific National 2027 fixed rate bond, as it has a relatively high duration at 7.1. If we can get our hands on more of the floating rate issue with the same maturity, I may well switch into that, just to reduce my interest rate exposure a little. Overall the duration of the portfolio is a relatively short 3.62 years, but if it looks as if rates will break out to the upside, which I actually think will not happen, then I will look to bring that in further by switching fixed to floating exposures. Mr. Market can prove even the best investors wrong very quickly sometimes!! The government bonds make up most of that duration, which is deliberate, as you need this to provide the downside protection, so some of it is unavoidable (by choice).
Please call your relationship manager if you are interested in adjusting your portfolio. If you are new to FIIG please call Chris Ip, our business development executive on 1800 01 01 81.