XTB Sales Director, Simon Riordan talks with CIO, Ian Martin
Ian explains what’s behind the recent performance of the Concentrated High Yield Portfolio. He also takes us through the Maturity Ladder portfolio returns and who this portfolio could be of interest to. Simon asks Ian what his view is for the next twelve months and the pros and cons of floating rate bonds vs fixed rate.
Note: The Concentrated High Yield Portfolio appears in the Cash Flow Tool and Retail Starter Portfolios, as the High Yield Portfolio.
We’re here today with Ian Martin our Chief Investment Officer, to have a chat about the XTB portfolios. There’s been some big performance numbers out you might have seen 9.8% total return p.a. for the Concentrated High Yield Portfolio. View portfolio performance.
So Ian, big numbers.
Yes, look we’ve obviously been very pleased with the performance of the portfolios. These are quite significant returns that we’ve seen on the Concentrated High Yield portfolio.
But, investors should be conscious that the CHY portfolio we select the highest yielding XTBs we can. And they are often the longest dated XTBs. So, we have 6-year to 8-year maturity. So those portfolios have benefited from the falling interest rate environment.
So, mostly capital growth, rather than income coming through?
Very, very much so. That’s obviously accelerated returns, because of the interest rate environment that we’re in.
How do you see that going forward in the next twelve months?
Look, certainly the ‘doves’ – the people who think interest rates are going down – are in control of the market. The market really seems to be responding to bearish news about the economy, which is good for the bond market. But, I think we should be cautious.
Nearly two 25 basis point cuts are priced in by the market. And we have seen three-year government bonds trading at 1.44%. So, rational investors must assume that the average of overnight rates for the next three years is going to be below 1.44% to make that attractive. That’s what the market is telling me.
And what about fixed vs floating at the moment – where do you see that playing out?
Look, certainly yield to maturity is low. We can still produce, with an AGL 2021 maturity XTB 2.5%. And look, there is value in that.
If the RBA does not go, and you hold that to maturity you will still get that 2.5% and you’ve still got that liquidity option. You’ve still got the daily mark to market benefit. And you’ve got the ability to sell small parcels if you want to get out.
At the same time, if you buy floating, we can probably generate – we like to refer to Traded Margin above BBSW – BBSW is 1.70. If you say you get a traded margin of 50 – you can get maybe 210 to 220 on a monthly style product.
That’s assuming you hold to maturity.
You’re holding it, but if rates go down then that will fall and you wouldn’t have locked those in. So that maybe attractive for some people. And if rates go up they can liquidate that without the exposure to interest rates.
The other portfolios haven’t done quite as well as the Concentrated High Yield.
Well, I would say the average or the total return is not as high. But, for what they’re designed to do – they actually do that very well.
The Maturity Ladder Portfolio, for instance, has done over 3.8%. That has no longer XTB than five years. And you get principal of one XTB each year being paid back, which is, I think a fantastic product for people looking for cash flow and to control interest rate exposure.
Ok, thanks very much.