With an extended ceasefire in the Middle East, markets were more stable to start the month off, although uncertainty remains. A higher quarterly inflation print has seen yields remain elevated, and the Sample Retail Portfolio now yields 5.93%* indicatively. Here we provide an update for May.
Markets were less volatile with continued negotiations in the Middle East, although a peace agreement still hasn’t been reached yet. Nevertheless, the window of more stability allowed a backlog of new primary deals to come to market, and while retail clients aren’t able to participate, it does shake out supply in some of the preferred names as wholesale investors look to switch.
With a solid March unemployment print, the headline rate unchanged at 4.3%, and a higher inflation print for the quarter, it was no surprise the Reserve Bank of Australia (RBA) raised rates when it met this month. The RBA, which was faced with higher inflation prior to the war, is now also faced with the repercussions of a petrol supply shock adding to inflationary pressures. With a reduction in total petrol supply, demand must fall in line with the decrease in supply. As such, markets are pricing in a further one and half rate hikes for this year, beyond the rate increase this month.
With yields remaining elevated given this backdrop, our Sample Retail Portfolio this month yields 5.93% to its assumed maturity date, and with an 84% allocation to investment grade bonds. While we continue to look for opportunities to add more inflation protection bonds (the beauty of these bonds is they keep pace with rising inflation and thus returns aren’t eroded) along with floating rate notes, we only slightly tweaked the portfolio this month to add diversification. Another key to portfolio performance in this environment is a well-diversified portfolio given the uncertainty.
Here we provide an update on the Sample Retail Portfolio for the month of May.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, designed to offer an appropriate level of risk with return. Overall, it remains more skewed towards preserving capital rather than chasing yield.
The portfolio is expected to yield around 5.93%* to maturity for the month, with 15 bonds and has approximately AUD207k invested.
The Arc Infrastructure WA Pty Ltd 2031 maturity senior secured fixed rate bond was added to the retail menu last month, and as such, we added it to the portfolio. With the current backdrop, we’re favouring good diversification across the portfolio to ensure we’re positioned no matter the market conditions. While it offered a similar yield and tenor to the Barclays 2031 maturity senior unsecured fixed rate bond, we held a 40% allocation to financials in the portfolio and the Arc 2031 bond, being an industrials exposure, further diversified this exposure. It provides a similar running yield also, so we achieved better diversification without sacrificing income. Having said that, we have no credit concerns with the Barclay’s 2031 bond, and it is a standout in the financials space in terms of its risk and reward profile.
The Sample Retail Portfolio, along with the full list of retail available bonds, can be found on the FIIG Website here. Factsheets are also available via MyFIIG.
*Please note the indicative yield shown is the expected yield to the assumed maturity/call dates of
the bonds included in the portfolio, based on swaps rates at the time of writing.