Maturity Ladder Portfolio
Description
A bond maturity ladder is a portfolio with one bond maturing per year. A 7 year portfolio will have a bond maturing in each of the next 7 years. The portfolio can be constantly rolled by reinvesting the maturing capital every year into new 7 year bonds. Or investors may use the maturing capital elsewhere.
A key purpose is to take advantage of bonds maturing at a fixed amount during a rising interest rate environment. Rising bond yields means bond market prices are falling. But all bonds mature at par value ($100 for XTBs), no matter what happens to bond yields, interest rates or market prices before maturity (assuming no issuer default).
If bond markets move into a period of sustained yield increases (prices falling), the bond ladder provides protection against this and in fact allows investors to take advantage of it by delivering capital back to investors annually that is impervious to the changes in yields or interest rates.
An example
In the 7 year portfolio above, when the first XTB matures, the $100 is reinvested into a new 7 year XTB. If yields have risen because the RBA has increased the cash rate, this new XTB will now be cheaper and its yield higher. $100 fixed capital now buys more XTBs than before the rate hike.
This turns the apparent disadvantage for fixed-rate bonds of their prices falling when interest rates are rising into an advantage.
Investors must hold the XTBs to maturity to take advantage of this approach. If you sold the 7 XTBs in the example in the second year of investment, and yields have risen in the meantime – you will be selling XTBs on market that will have been impacted by the yield increase (their prices will have dropped). Maturity delivers this advantage.
Investment objective
Overall, the objective of this approach is to construct a fixed income model portfolio within the investable universe of XTBs that aims to provide:
- An opportunity to benefit from rising interest rates using fixed-rate bonds
- A regular and predictable income stream
- Return of capital from maturing XTBs on an annual basis
- A capital preservation focus and low levels of price volatility
- Liquidity, to ensure investment flexibility
Model portfolio manager
Australian Corporate Bond Company Limited (ACBC)
Investment strategy and approach
To ensure the best opportunity to meet the model portfolio’s objectives, ACBC selects a portfolio of XTBs using a 2-stage quantitative process, with a qualitative overlay.
Quantitative process
Stage 1: Selection
Define the investment universe of:
- Rank by increasing maturity date
- Rank by highest yield to maturity
- Investment grade credit only¹
- Weighting parameters (issuer, security, sector²)
- Available liquidity
¹ At time of establishment
² As defined by GICS Sub Industry
Stage 2: Application
Apply a set of rules to select an optimal XTB maturity ladder model portfolio.
Qualitative overlay
Adjustments may be made to the portfolio to reflect market conditions, despite the rules being satisfied.
The general approach is to hold securities to maturity and have a security mature on a yearly basis. However, model portfolio changes may be made in response to:
- An increase in the yield to maturity, by adding securities
- An increase in the universe of available securities
- Improvement to the portfolio, by switching securities
Designed for investors who…
- Are looking for protection against rising interest rates
- Have a firm view rates will increase over a period and want to take advantage of this using fixed-rate XTBs that will mature at $100
- Seek a transparent and capital-stable fixed income model portfolio that offers a regular and predictable income stream
- Seek a return of capital on a yearly basis to manage their cash flow requirements.
Portfolio parameters
| Parameters | |
| Inception date | 14 July 2016 |
| Investment universe | Available XTBs, fixed or floating |
| Minimum number of securities | 5 |
| Minimum credit rating | Individual bonds must be investment grade at the time of inclusion within the model portfolio |
| Maximum individual issuer exposure | 30% |
| Maximum individual security weighting | 20% |
| Maximum individual sector² weighting | 30% |
| Capital structure parameters |
|
| Benchmark | RBA cash rate |
| Maximum maturity | Maximum maturity of 8 years per security |
| Liquidity | All XTBs must have sufficient observable liquidity |
View portfolio rules and maintenance
View Model Portfolio Performance Reports
Request this portfolio
To request more information about this portfolio, and receive details of the XTBs included within the portfolio please contact us, or complete the form on the link below:
Tel: 1800 995 993
Email: advisers@xtbs.com.au
