Investing

Storm clouds still loom large for the economy

  • 22.Oct.2019
  • Michael Rockliff,  XTB

Q3 of 2019 was a grind forward for equities with the ASX 200 Accumulation Index up around 2.40% for the quarter. However, in Australian fixed income world it was all happening. The RBA had previously been on hold for the last 30 meetings and then proceeded to cut the official cash rate in June, July and then October by 25bps. This took our official cash rate from our previous record low of 1.50% to now our current record low of 0.75%.

The 10-year Australian government bond rate this year has had a considerable fall (bond prices rise when yields fall). It has reached several new all-time lows with the lowest level achieved on 16 August 2019 at 85bps.

10-year Australian government bond

Source: Iress

The market is still very concerned with the Australian economy. Global trade and tariff issues are definitely a dark cloud over our already weakened economy. As you can see from the futures chart below, the market is still pricing in up to two more possible rate cuts over the next eight months.

Chart 1: ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

As at market close 18 October 2019

Source: ASX

Not all fixed income is created equal

We continue to see high yielding LICs come to the market getting large amounts of money as investors chase yield – but at what cost? If you have invested in to these investments do you understand the risks and the underlying investments the LIC holds in the event of a market disruption?

XTB Performance Update

XTB model portfolios and SMAs continue to produce strong returns. I have included a link below to a report that covers the performance of our recommended portfolios. Since inception to 30 September 2019, the performance of each of the portfolios was:

Portfolio Total Return – 12 Month Total Return – Since Inception
Concentrated High Yield 16.77% 8.60%
High Yield 14.35% 7.85%
Maturity Ladder – Series 1 4.87% 4.72%
Maturity Ladder – Series 2 4.87% 4.87%
Maturity Ladder – Series 3 5.73% 4.62%
Monthly Income (Floaters) 2.84% 2.81%
SMA 8.61% 5.98%

Please note that past performance is not an indicator of future performance.

*The Maturity Ladder is designed to mature 1 XTB per year. For example, the ML1 portfolio started with 5 XTBs and now only has 3 XTBs left in the portfolio. Within the remaining ML1 XTBs, one is due to mature in each of the next three years (2020, 2021 and 2022) to close the ML1 strategy.

Fixed income considerations

Given the number of products promoting their fixed income credentials, here are some key features you can consider:

  • Is there transparency in your investment? For a defensive investment it can be important to know what is in the portfolio. This often comes to the fore when markets come under stress;
  • How are managers describing future performance expectations and what is driving this?
  • A bond with a fixed coupon should be described using Yield to Maturity;
  • A floating rate bond can be described using a margin over BBSW (sometimes expected Yield to Maturity is used by assuming what future BBSW will be).
  • Fixed and floating rate bond portfolios should be examined after fees.
  • Credit funds usually assume a margin over BBSW and quote an expected return. It can be useful to check the time frame for which they are quoting the expected return, especially if the portfolio is not disclosed;
  • Historical returns are generally only useful when compared to the correct benchmark so investors can understand if a manager is out performing those benchmarks.

For more information on the ACBC Fixed Income No. 1 SMA  or the ESG Fixed Income SMA please follow this link – XTB SMA

View performance reports

Call us on 1800 995 993 and we can prepare a customised portfolio cash flow sheet for your client.

Disclaimer
Past performance is no guarantee of future performance. Returns may reflect the underlying bond performance adjusted for XTB fees. The performance of fixed rate bonds has been positively impacted by recent interest rate cuts, whilst there is an expectation of further interest rate cuts, as evidenced by the futures market pricing, if the interest rate cycle turns, it is likely that the performance of fixed rate bonds will be negatively impacted.
The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should read the PDS that relates to that Class of XTB prior to making an investment decision and consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.

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Events

  • 16Nov 2019

    YTMF14: Bank of Queensland BBSW + 1.02% 16 NOV 2021

    This is the coupon date

  • 19Nov 2019

    YTMQF3: QANTAS 7.75% 19 MAY 2022

    This is the coupon date

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